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Multinational Financial Management Alan Shapiro

7th Edition J.Wiley & SonsPower Points byJoseph F. Greco, Ph.D.California State University, Fullerton

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CHAPTER 13

THE EUROMARKETS

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CHAPTER OVERVIEW:

I. THE EUROCURRENCY MARKETSII. EUROBONDSIII.NOTE ISSUANCE FACILITIES AND

EURONOTESIV. EUOR COMMERCIAL PAPERV. THE ASIA CURRENCY MARKETS

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I. THE EUROCURRENCY MARKETS

THE EUROMARKETS-the most important international

financial markets today.A. The Eurocurrency Market

1. Composed of eurobanks who accept/maintain deposits of

foreign currency2. Dominant currency: US$

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THE EUROCURRENCY MARKETSB. Growth of Eurodollar Market

caused by restrictive US governmentpolicies, especially

1. Reserve requirements on deposits2. Special charges and taxes3. Required concessionary loan rates4. Interest rate ceilings5. Rules which restrict bank

competition.

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THE EUROCURRENCY MARKETS

C. Eurodollar Creation involves1. A chain of deposits2. Changing control/usage of

deposit

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THE EUROCURRENCY MARKETS3.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 Clausesa. Clause gives borrower option

to switch currency of loan at rollover.b. Reduces exchange rate risk

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THE EUROCURRENCY MARKETS

5. Domestic vs. Eurocurrency Markets

a. Closely linked rates by arbitrage

b. Euro rates: tend to lower lending, higher

deposit

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II. EUROBONDSA. DEFINITION OF EUROBONDS

bonds sold outside the country of currency denomination.

1. Recent Substantial Market Growth -due to use of swaps.

a financial instrument which gives 2 parties the right to exchange streams of income over time.

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EUROBONDS

2. Links to Domestic Bond Marketsarbitrage has eliminated

interestrate differential.

3. Placementunderwritten by syndicates of

banks

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EUROBONDS4. Currency Denomination

a. Most often US$b. “Cocktails” allow a basket of

currencies5. Eurobond Secondary Market -result of rising investor demand6. Retirement

a. sinking fund usuallyb. some carry call provisions.

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EUROBONDS7. Ratings

a. According to relative riskb. Rating Agencies Moody’s, Standard & Poor

8. Rationale For Market Existencea. Eurobonds avoid government

regulationb. May fade as market

deregulate

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THE EUROMARKETS

B. Eurobond vs. Eurocurrency Loans1. Five Differences

a. Eurocurrency loans use variable rates

b. Loans have shorter maturities

c. Bonds have greater volumed. Loans have greater flexibilitye. Loans obtained faster

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III. NOTE ISSUANCE FACILITIES AND EURONOTES

A. Note Issuance Facility (NIF)1. Low-cost substitute for loan2. Allows borrowers to issue

own notes3. Placed/distributed by banks

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NOTE ISSUANCE FACILITIES AND EURONOTES

B. 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

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IV. EURO-COMMERCIAL PAPERI. SHORT-TERM FINANCING

A. Euronotes and Euro-Commercial Paper

1. Euronotesunsecured short-term debt

securities denominated in US$ and issued by corporations

and governments.2. Euro-commercial paper(CP)

euronotes not bank underwritten

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EURO-COMMERCIAL PAPER

B. U.S. vs. Euro-CPs1. Average maturity longer (2x)

for Euro-CPs2. Secondary market for Euro;

not U.S. CPs.3. Smaller fraction of Euro use

credit rating services to rate.

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