Alan Shapiro 10 th Edition John Wiley amp Sons Inc PowerPoints by Joseph F Greco PhD California State University Fullerton CHAPTER 13 The Euromarkets 3 THE EUROCURRENCY MARKETS ID: 626764
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Multinational Financial Management Alan Shapiro10th Edition John Wiley & Sons, Inc.
PowerPoints
by
Joseph F. Greco, Ph.D.
California State University, FullertonSlide2
CHAPTER 13
The EuromarketsSlide3
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THE EUROCURRENCY MARKETSI. THE EUROMARKETS -the most obvious example of the globalization of financial markets A. The Eurocurrency Market 1. Composed of
eurobanks
who accept/maintain deposits of foreign currency
2. Dominant currency: US$Slide4
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THE EUROCURRENCY MARKETSB. Growth of Eurodollar Market caused by restrictive US government policies, especially 1. Reserve requirements on deposits 2. Special charges and taxes 3. Required concessionary loan rates
4. Interest rate ceilings
5. Rules which restrict bank competition.Slide5
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THE EUROCURRENCY MARKETSC. Eurodollar Creation involves 1. A chain of deposits 2. Changing control/usage of deposit Slide6
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THE EUROCURRENCY MARKETS 3. Eurocurrency loans a. Use London Interbank Offer Rate: LIBOR as basic rate b. Six month rollovers c. Risk indicator: size of margin between cost and rate charged.
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THE EUROCURRENCY MARKETS 4. Multicurrency Clauses a. Clause gives borrower option to switch currency of loan at rollover. b. Reduces exchange rate risk Slide8
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THE EUROCURRENCY MARKETS5. Domestic vs. Eurocurrency Markets a. Closely linked rates by arbitrage b. Euro rates: tend to lower lending, higher depositSlide9
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EUROBONDSA. DEFINITION OF EUROBONDS bonds sold outside the country of currency denomination 1. a financial instrument which gives 2 parties the right to exchange streams of income over time 2. Recent Substantial Market Growth due to use of swaps
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EUROBONDS 3. Links to Domestic Bond Markets: arbitrage has eliminated interest rate differential 4. Placement underwritten by syndicates of banks
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EUROBONDS 5. Currency Denomination a. Most often US$ b. “Cocktails” allow a basket of currencies 6. Eurobond Secondary Market
-result of rising investor demand
7. Retirement
a. sinking fund usually
b. some carry call provisions.Slide12
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EUROBONDS 8. Ratings a. According to relative risk b. Rating Agencies
Moody’s, Standard & Poor
9. Rationale For Market Existence
a. Eurobonds avoid government
regulation
b. May fade as market deregulateSlide13
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EUROBONDSB. Eurobond vs. Eurocurrency Loans 1. Five Differences a. Eurocurrency loans use variable rates b. Loans have shorter maturities
c. Bonds have greater volume
d. Loans have greater flexibility
e. Loans obtained fasterSlide14
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NOTE ISSUANCE FACILITIES AND EURONOTESA. Note Issuance Facility (NIF) 1. Low-cost substitute for loan 2. Allows borrowers to issue own notes 3. Placed/distributed by banks
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NOTE ISSUANCE FACILITIES AND EURONOTESB. NIFs vs. Eurobonds 1. Differences: a. Notes draw down credit as needed b. Notes let owners determine timing
c. Notes must be held to maturity Slide16
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EURO-COMMERCIAL PAPER I. SHORT-TERM FINANCING A. Euronotes and Euro-Commercial Paper 1. Euronotes
unsecured short-term debt securities denominated in US$ and issued by corporations and governments.
2. Euro-commercial paper(CP)
euronotes
are not bank
underwritten
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EURO-COMMERCIAL PAPER B. U.S. vs. Euro-CPs 1. Average maturity longer (2x) for Euro-CPs 2. Secondary market for Euro;
not U.S. CPs.
3. Smaller fraction of Euro use
credit rating services to rate.Slide18
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