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CHAPTER 15CHAPTER 15
INTERNATIONAL INTERNATIONAL FINANCING AND FINANCING AND INTERNATIONAL INTERNATIONAL
FINANCIAL MARKETSFINANCIAL MARKETS
INTERNATIONAL FINANCING AND INTERNATIONAL FINANCING AND INTERNATIONAL FINANCIAL MARKETSINTERNATIONAL FINANCIAL MARKETS
CHAPTER OVERVIEW:CHAPTER OVERVIEW:I.I. CORPORATE SOURCES AND USES CORPORATE SOURCES AND USES
OF FUNDSOF FUNDS
II.II. NATIONAL CAPITAL MARKETS AS NATIONAL CAPITAL MARKETS AS INTERNATIONAL FINANCIAL INTERNATIONAL FINANCIAL CENTERSCENTERS
III.III. THE EUROMARKETSTHE EUROMARKETS
IV.IV. INTEREST RATE AND CURRENCY INTEREST RATE AND CURRENCY SWAPSSWAPS
V.V. DEVELOPMENT BANKSDEVELOPMENT BANKS
I.I. CORPORATE SOURCES CORPORATE SOURCES AND USES OF FUNDSAND USES OF FUNDS
I.I. CORPORATE SOURCES AND USES OF CORPORATE SOURCES AND USES OF FUNDSFUNDSA.A. 3 General Sources of Funds:3 General Sources of Funds:
1.1. Internally-generated cashInternally-generated cash2.2. Short-term external fundsShort-term external funds3.3. Long-term external fundsLong-term external funds
CORPORATE SOURCES AND CORPORATE SOURCES AND USES OF FUNDSUSES OF FUNDS
B.B. Forms of SecuritiesForms of Securities1.1. EquityEquity2.2. Debt: the most preferred formDebt: the most preferred form
CORPORATE SOURCES AND CORPORATE SOURCES AND USES OF FUNDSUSES OF FUNDS
C.C. Debt Instruments UsedDebt Instruments Used
1.1. Commercial Bank LoansCommercial Bank Loans
2.2. BondsBonds
a.a. Publicly issuedPublicly issued
b.b. Privately issuedPrivately issued
CORPORATE SOURCES AND CORPORATE SOURCES AND USES OF FUNDSUSES OF FUNDS
D.D. Financial Markets v. Financial Financial Markets v. Financial IntermediariesIntermediaries
1.1. SecuritizationSecuritization
a. Definition:a. Definition:
replacing bank loans withreplacing bank loans with
securities issued in public securities issued in public
markets.markets.
CORPORATE SOURCES AND CORPORATE SOURCES AND USES OF FUNDSUSES OF FUNDS
b.b. Reflects reduction in access Reflects reduction in access costscosts
due todue to
1.)1.) Technological Technological improvementsimprovements
2.)2.) GlobalizationGlobalization
CORPORATE SOURCES AND CORPORATE SOURCES AND USES OF FUNDSUSES OF FUNDS
E. Globalization of Financial MarketsE. Globalization of Financial Markets-has led to-has led to
1.1. Global center competitionGlobal center competition2.2. Regulatory arbitrageRegulatory arbitrage
II.II. NATIONAL CAPITAL MARKETS NATIONAL CAPITAL MARKETS AS INTERNATIONAL CENTERS AS INTERNATIONAL CENTERS
II.II.NATIONAL CAPITAL MARKET ASNATIONAL CAPITAL MARKET AS
INTERNATIONAL CENTERSINTERNATIONAL CENTERS
A.A. Principal Functions of Financial Principal Functions of Financial CentersCenters
-between savers and borrowers-between savers and borrowers
1.1. To transfer purchasing powerTo transfer purchasing power
2.2. To allocate fundsTo allocate funds
NATIONAL CAPITAL MARKETS NATIONAL CAPITAL MARKETS AS INTERNATIONAL CENTERSAS INTERNATIONAL CENTERS
B.B. International Financial MarketInternational Financial Market
1.1. Development of most Development of most important:important:
a.a. LondonLondon
b.b. New YorkNew York
c.c. TokyoTokyo
NATIONAL CAPITAL MARKETS NATIONAL CAPITAL MARKETS AS INTERNATIONAL CENTERSAS INTERNATIONAL CENTERS
2.2.Other Centers for IntermediariesOther Centers for Intermediaries
a.a. SingaporeSingapore
b.b. Hong KongHong Kong
c.c. the Bahamasthe Bahamas
NATIONAL CAPITAL MARKETS NATIONAL CAPITAL MARKETS AS INTERNATIONAL CENTERSAS INTERNATIONAL CENTERS
3. Prerequisites to be a financial 3. Prerequisites to be a financial centercenter
a.a. political stabilitypolitical stability
b.b. minimal government minimal government interventionsinterventions
c.c. legal infrastructurelegal infrastructure
d.d. financial infrastructurefinancial infrastructure
NATIONAL CAPITAL MARKETS NATIONAL CAPITAL MARKETS AS INTERNATIONAL CENTERSAS INTERNATIONAL CENTERS
C.C. Foreign Access to Domestic MarketsForeign Access to Domestic Markets
1. The Foreign Bond Market1. The Foreign Bond Market
a. Extension of domestic marketa. Extension of domestic market
b. Issues floated by foreign cos. b. Issues floated by foreign cos. or governmentsor governments
c. Examples:c. Examples:
yankee bonds, samurai yankee bonds, samurai bondsbonds
NATIONAL CAPITAL MARKETS NATIONAL CAPITAL MARKETS AS INTERNATIONAL CENTERSAS INTERNATIONAL CENTERS
c.c. Three Major Types of Foreign Three Major Types of Foreign
BondsBonds
1.)1.) Fixed rateFixed rate
2.)2.) Floating rateFloating rate
3.)3.) Equity relatedEquity related
NATIONAL CAPITAL MARKETS NATIONAL CAPITAL MARKETS AS INTERNATIONAL CENTERSAS INTERNATIONAL CENTERS
2.2. The Foreign Bank MarketThe Foreign Bank Market
a.a. Extension of domestic marketsExtension of domestic markets
b.b. Important funding source:Important funding source:
Japanese banks for U.S. firmsJapanese banks for U.S. firms
NATIONAL CAPITAL MARKETS NATIONAL CAPITAL MARKETS AS INTERNATIONAL CENTERSAS INTERNATIONAL CENTERS
3.3.The Foreign Equity MarketThe Foreign Equity Market
a.a. Cross listing internationally Cross listing internationally
cancan
1.) diversify risk1.) diversify risk
2.) increase potential demand2.) increase potential demand
3.) build base of global 3.) build base of global
owners.owners.
NATIONAL CAPITAL MARKETS NATIONAL CAPITAL MARKETS AS INTERNATIONAL CENTERSAS INTERNATIONAL CENTERS
D.D. Downside of Global Financial Downside of Global Financial MarketsMarkets
-abrupt shifts in capital flows-abrupt shifts in capital flows
II.II. THE EUROMARKETSTHE EUROMARKETS
II.II.THE EUROMARKETSTHE EUROMARKETS
-the most important international -the most important international financial markets today. financial markets today.
A.A. The Eurocurrency MarketThe Eurocurrency Market1. 1. Composed of eurobanks who Composed of eurobanks who
accept/maintain deposits of accept/maintain deposits of foreign currencyforeign currency
2. 2. Dominant currency: US$Dominant currency: US$
THE EUROMARKETSTHE EUROMARKETS
B.B. Growth of Eurodollar MarketGrowth of Eurodollar Market
caused by restrictive US governmentcaused by restrictive US government
policies, especiallypolicies, especially
1.1. Reserve requirements on depositsReserve requirements on deposits
2.2. Special charges and taxesSpecial charges and taxes
3.3. Required concessionary loan ratesRequired concessionary loan rates
4.4. Interest rate ceilingsInterest rate ceilings
5.5. Rules which restrict bank Rules which restrict bank competition.competition.
THE EUROMARKETSTHE EUROMARKETS
C.C. Eurodollar Creation involvesEurodollar Creation involves1.1. A chain of depositsA chain of deposits2.2. Changing control/usage of Changing control/usage of
depositdeposit
THE EUROMARKETSTHE EUROMARKETS
3.3.Eurocurrency loansEurocurrency loans
a.a. Use London Interbank Offer Use London Interbank Offer Rate: LIBOR as basic rateRate: LIBOR as basic rate
b.b. Six month rolloversSix month rollovers
c.c. Risk indicator: size of Risk indicator: size of margin between cost and margin between cost and raterate charged.charged.
THE EUROMARKETSTHE EUROMARKETS
4.4. Multicurrency ClausesMulticurrency Clauses
a. Clause gives borrower option to a. Clause gives borrower option to
switch currency of loan at switch currency of loan at rollover. rollover.
b. Reduces exchange rate riskb. Reduces exchange rate risk
THE EUROMARKETSTHE EUROMARKETS
5.5.Domestic vs. Eurocurrency MarketsDomestic vs. Eurocurrency Markets
a. Closely linked rates by arbitragea. Closely linked rates by arbitrage
b. Euro rates: tend to lower b. Euro rates: tend to lower lending, lending, higher deposithigher deposit
THE EUROMARKETSTHE EUROMARKETS
D.D. EurobondsEurobonds
bonds sold outside the country of bonds sold outside the country of currency currency denomination.denomination.
1. Recent Substantial Market Growth 1. Recent Substantial Market Growth
-due to use of swaps.-due to use of swaps. a financial instrument whicha financial instrument which gives 2 parties the right togives 2 parties the right to exchange streams of incomeexchange streams of income over time.over time.
THE EUROMARKETSTHE EUROMARKETS
2. Links to Domestic Bond Markets2. Links to Domestic Bond Markets
arbitrage has eliminated arbitrage has eliminated interestinterest
rate differential.rate differential.
3. Placement3. Placement
underwritten by syndicates of underwritten by syndicates of banksbanks
THE EUROMARKETSTHE EUROMARKETS
4. Currency Denomination4. Currency Denominationa. Most often US$a. Most often US$b. “Cocktails” allow a basket ofb. “Cocktails” allow a basket of
currenciescurrencies5. Eurobond Secondary Market5. Eurobond Secondary Market -result of rising investor demand-result of rising investor demand6. Retirement6. Retirement
a. sinking fund usuallya. sinking fund usuallyb. some carry call provisions.b. some carry call provisions.
THE EUROMARKETSTHE EUROMARKETS
7. Ratings7. Ratings
a. According to relative riska. According to relative risk
b. Rating Agenciesb. Rating Agencies
Moody’s, Standard & PoorMoody’s, Standard & Poor
8. Rationale For Market Existence8. Rationale For Market Existence
a. Eurobonds avoid governmenta. Eurobonds avoid government
regulationregulation
b. May fade as market b. May fade as market deregulatederegulate
THE EUROMARKETSTHE EUROMARKETS
E.E. Eurobond vs. Eurocurrency LoansEurobond vs. Eurocurrency Loans
1. Five Differences1. Five Differences
a. Eurocurrency loans use variable a. Eurocurrency loans use variable ratesrates
b. Loans have shorter maturitiesb. Loans have shorter maturities
c. Bonds have greater volumec. Bonds have greater volume
d. Loans have greater flexibilityd. Loans have greater flexibility
e. Loans obtained fastere. Loans obtained faster
THE EUROMARKETSTHE EUROMARKETS
F.F. Note Issuance Facility (NIF) Note Issuance Facility (NIF)
1. Low-cost substitute for loan1. Low-cost substitute for loan
2. Allows borrowers to issue own notes2. Allows borrowers to issue own notes
3. Placed/distributed by banks3. Placed/distributed by banks
THE EUROMARKETSTHE EUROMARKETS
G. NIFs vs. EurobondsG. NIFs vs. Eurobonds
1. Differences:1. Differences:
a. Notes draw down credit as neededa. Notes draw down credit as needed
b. Notes let owners determine timingb. Notes let owners determine timing
c. Notes must be held to maturityc. Notes must be held to maturity
IV. INTEREST RATE AND IV. INTEREST RATE AND CURRENCY SWAPSCURRENCY SWAPS
IV.IV. INTEREST RATE AND CURRENCYINTEREST RATE AND CURRENCY
SWAPSSWAPS
A. A. INTEREST RATE SWAPSINTEREST RATE SWAPS
1. Definition1. Definition
an agreement between 2 parties toan agreement between 2 parties to
exchange US$ interest paymentsexchange US$ interest payments
for a specific maturity on an for a specific maturity on an agreed notional amount.agreed notional amount.
INTEREST RATE AND CURRENCY INTEREST RATE AND CURRENCY SWAPSSWAPS
a. Notional principal: a reference a. Notional principal: a reference amount used only to amount used only to
calculate calculate interest expense interest expense but never repaid.but never repaid.
b. Maturities: less than 1 to over 15 b. Maturities: less than 1 to over 15 yearsyears
INTEREST RATE AND CURRENCY INTEREST RATE AND CURRENCY SWAPSSWAPS
2. 2. Types of Interest Rate SwapsTypes of Interest Rate Swaps
a. Coupon swapa. Coupon swap
b. Basis swapb. Basis swap
3.3. Usage:Usage:
to reduce risk potential and costs.to reduce risk potential and costs.
INTEREST RATE AND CURRENCY INTEREST RATE AND CURRENCY SWAPSSWAPS
B.B. Currency SwapsCurrency Swaps
1. Definition1. Definition
two parties exchange foreign-two parties exchange foreign-currency-currency-
denominated debt at periodic denominated debt at periodic intervals.intervals.
2. Purpose: similar to parallel loan2. Purpose: similar to parallel loan
INTEREST RATE AND CURRENCY INTEREST RATE AND CURRENCY SWAPSSWAPS
3.3. Differences of a Currency Swap:Differences of a Currency Swap:
a. Currency swap is not a loana. Currency swap is not a loan
b. No interest expense; no balance b. No interest expense; no balance sheet entrysheet entry
c. The right to offset any non-c. The right to offset any non-paymentpayment
is more firmly establishis more firmly establish
INTEREST RATE AND CURRENCY INTEREST RATE AND CURRENCY SWAPSSWAPS
4. Similarities between Interest Rate and4. Similarities between Interest Rate and
Currency SwapsCurrency Swaps
a. Avoid exchange rate riska. Avoid exchange rate risk
b. Exchange rate is only a reference tob. Exchange rate is only a reference to
determine amounts exchangeddetermine amounts exchanged
INTEREST RATE AND CURRENCY INTEREST RATE AND CURRENCY SWAPSSWAPS
5. Economic Benefits of Swaps5. Economic Benefits of Swaps
when arbitrage prohibited, they when arbitrage prohibited, they
provide long-term financing.provide long-term financing.
V.V. DEVELOPMENT BANKSDEVELOPMENT BANKS
V.V. DEVELOPMENT BANKSDEVELOPMENT BANKS
A. General PurposeA. General Purpose
founded by governments to help founded by governments to help
finance very large finance very large
infrastructure infrastructure projects.projects.
DEVELOPMENT BANKSDEVELOPMENT BANKS
B.B. Types of Development BanksTypes of Development Banks1.1. World Bank Group includesWorld Bank Group includes
a. International Bank for a. International Bank for Reconstruction and Reconstruction and Development Developmentb. International Development b. International Development
Association Associationc. International Finance c. International Finance
Corporation Corporation
DEVELOPMENT BANKSDEVELOPMENT BANKS
B.B. Types of Development Banks (con’t)Types of Development Banks (con’t)
2.2. Regional Development BanksRegional Development Banks
finance industry, agricultural, finance industry, agricultural, andand
infrastructure projectsinfrastructure projects
3.3. National Development BanksNational Development Banks
concentrate on a particular concentrate on a particular industry industry or region.or region.