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8/11/2019 International Financial Markets Final
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INTERNATIONAL FINANCIAL MARKETS
PROJECT REPORT
On
INTERN TION L FIN NCI L M RKETS
SUBMITTED BY
RESHM VISHNU M LI
ROLL NO 31
M.COM B NKING ND FIN NCE
SEMESTER IV (2013201!"
UNDER THE GUID NCE OF
P#$%. &' K)#n*'+)# .
SUBMITTED TO
S.K SOM IY DEGREE COLLEGE OF RTS,
SCIENCE ND COMMERCE,
VIDHY VIH R (E", MUMB I!000--
FFILI TED TO UNIVERSITY OF MUMB I
MCOM B & F SEM-IV Page 1
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INTERNATIONAL FINANCIAL MARKETS
CERTIFICATE
This is to certify that (Reshma Mali) of M.Com Banking &Finance
Semester I (!"#$%#) has s'ccessf'lly Comlete the ro*ect on(I+TER+ATI,+A- FI+A+CIA- MARETS) g'iance of /rof. A*it
arnikar.
Co'rse Co%orinator /rincial
/ro*ect g'ie0Internal E1aminer
E1ternal E1aminer
MCOM B & F SEM-IV Page 2
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INTERNATIONAL FINANCIAL MARKETS
2EC-ARATI,+
I (Reshma Mali) a st'ent of M.com Banking & Finance Semester I
(!"#$%#) here3y eclare that I ha4e Comlete the ro*ect on
(International Financial Markets).
The information s'3mitte is tr'e an original to the 3est of my
kno5lege.
Signat're
(Reshma Mali)
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INTERNATIONAL FINANCIAL MARKETS
AC+,6-E7EME+T
I 5o'l sincerely like to gi4e my heartfelt ackno5legement an
thanks to my arents. Any amo'nt of thanks gi4en to them 5ill ne4er
3e s'fficient.
I 5o'l sincerely like to thank o'r /rincial 2r.Sangeeta ohli. I
5o'l also like to thank my ro*ect g'ie for his 4al'a3le s'ort
an g'iance 5hene4er neee.
I also feel heartiest sense of o3ligation my li3rary staff mem3ers &
seniors 5ho hele in collection of 2ata an materials an also in
this rocessing as 5ell as in rafting man'scrit.-ast8 3't not the least8 I 5o'l like to thank my friens & colleag'es
for al5ays 3eing there.
(Reshma Mali)
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INTERNATIONAL FINANCIAL MARKETS
I+TER+ATI,+A- FI+A+CIA- MARETS
Sr.
+o.
Ine1 /age
+o.
#
!
$
9
:
;
Ly stable distributions" *he scale of change, or olatility, depends on
the length of the time unit to apowera bit more than 1H2" >arge changes
up or down are more likely than what one would calculate using a
=aussian distribution with an estimated standard deiation"
new area of concern is the proper analysis of international market
effects" s connected as today?s global financial markets are, it is
important to reali$e that there are both benefits and conse+uences to a
global financial network" s new opportunities appear due to integration,
so do the possibilities of contagion" *his presents uni+ue issues when
attempting to analy$e markets, as a problem can ripple through the entire
connected global network ery +uickly" or e%ample, a bank failure in
one country can spread +uickly to others, which makes proper analysis
more difficult"
MCOM B & F SEM-IV Page 15
http://en.wikipedia.org/wiki/Statistical_analysis_of_financial_marketshttp://en.wikipedia.org/wiki/Statistical_financehttp://en.wikipedia.org/wiki/Charles_Dowhttp://en.wikipedia.org/wiki/Dow_Jones_%26_Companyhttp://en.wikipedia.org/wiki/Dow_Jones_%26_Companyhttp://en.wikipedia.org/wiki/The_Wall_Street_Journalhttp://en.wikipedia.org/wiki/Dow_Theoryhttp://en.wikipedia.org/wiki/Technical_analysishttp://en.wikipedia.org/wiki/Market_trendshttp://en.wikipedia.org/wiki/Random_walk_hypothesishttp://en.wikipedia.org/wiki/Volatility_(finance)http://en.wikipedia.org/wiki/Beno%C3%AEt_Mandelbrothttp://en.wikipedia.org/wiki/Gaussian_distributionhttp://en.wikipedia.org/wiki/Levy_functionhttp://en.wikipedia.org/wiki/Power_lawhttp://en.wikipedia.org/wiki/Standard_deviationhttp://en.wikipedia.org/wiki/Statistical_analysis_of_financial_marketshttp://en.wikipedia.org/wiki/Statistical_financehttp://en.wikipedia.org/wiki/Charles_Dowhttp://en.wikipedia.org/wiki/Dow_Jones_%26_Companyhttp://en.wikipedia.org/wiki/Dow_Jones_%26_Companyhttp://en.wikipedia.org/wiki/The_Wall_Street_Journalhttp://en.wikipedia.org/wiki/Dow_Theoryhttp://en.wikipedia.org/wiki/Technical_analysishttp://en.wikipedia.org/wiki/Market_trendshttp://en.wikipedia.org/wiki/Random_walk_hypothesishttp://en.wikipedia.org/wiki/Volatility_(finance)http://en.wikipedia.org/wiki/Beno%C3%AEt_Mandelbrothttp://en.wikipedia.org/wiki/Gaussian_distributionhttp://en.wikipedia.org/wiki/Levy_functionhttp://en.wikipedia.org/wiki/Power_lawhttp://en.wikipedia.org/wiki/Standard_deviation8/11/2019 International Financial Markets Final
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INTERNATIONAL FINANCIAL MARKETS
Financial market slang
/oison ill, when a company issues more shares to preent being
bought out by another company, thereby increasing the number of
outstanding shares to be bought by the hostile company making the
bid to establish maEority"
'ant, a +uantitatie analyst with a
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#oth bonds and credit (currency) financing hae their adantages and
disadantages" or a gien company, under specific circumstances, one
method of financing may be preferred to the other" *he maEor differences
are6
1. Cost of 3orro5ing
#onds are issued in both fi%ed rate and floating rate forms" i%ed rate
bonds are an attractie e%posure management tool since the known long!term currency inflows can be offset by the known long!term outflows in
the same currency" In contrast, currency loans carry ariable
rates"
2" Mat'rity
#onds hae longer maturities while the period of borrowing in the
currency market has tended to lengthen oer time"
3" Si>e of the iss'e
arlier, the funds aailable for lending at any time hae been much more
in the inter!bank market than in the bond market" #ut of late, this
situation does not hold true" &oreoer, although in the past the flotation
costs of a uro currency loan hae been much lower than a uro bond
(about ;"5 M of the total loan amount ersus about 2"25 M of the face
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alue of a uro bond issue), compensation has worked to lower uro
bond flotation costs"
4. Fle1i3ility
In a uro bond issue, the funds must be drawn in one sum on a fi%ed date
and repaid according to a fi%ed schedule, unless the borrower pays a
substantial prepayment penalty" #y contrast, the drawdown in a floating
rate loan can be staggered tosuit the borrowerNs needs and can be repaidin whole or in part at any time, often without penalty" &oreoer, a uro
currency loan with a multi!currency clause enables the borrower to switch
currencies on any roll!oer date, whereas switching the denomination of a
uro bond from currency to currency # would re+uire a costly,
combined, refunding and reissuing operation"
9. See
unds can be raised by a known borrower ery +uickly in the uro
currency market" Cften, a period of two to three weeks should suffice"
uro bond financing generally takes more time, though the difference is
becoming less significant"
!. Creit Market
8redit or >oans are the loans e%tended for one year or longer" *he market
that deals in such loans is called 8redit &arket"
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*he common maturity for credit loans is 5 years" 0ince banks accept
short!term deposits and proide long!term loans, it is likely that assetliability mismatch may arise" *o aoid this banks often e%tend floating
rate credit loans fi%ed to some market interest rate" *he >ondon Inter
#ank Cffer Bate (>I#CB) is the most commonly used interest rate" It is
the rate charged for loans between #anks"
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/articiants in creit Market
*he maEor lending banks in the credit market are banks, merican,
apanese, #ritish, 0wiss, rench, =erman and sian (specially that of0ingapore) banks, 8hemical #ank, < &organ, 8iticorp, #ankers *rust,
8hase &anhattan #ank, irst .ational #ank of 8hicago, #arclay?s #ank,
.ational :estminster, #.
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O Pari!passu clause that preents the borrower from contracting new
debts that subordinate the interest of lenders
O "xchange option clause that allows the withdrawal of a part or totalityof loan in another currency
O #egative guarantee clause that commits the borrower not to contract
other debts that subordinate the interest of lenders"
Characteristics of creit
maEor part (more than 7; M) of the debts is made in @0 dollars" *he
second (but far behind) is
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generally renewable (roll oer credit) eery si% months, fi%ed with
reference to >I#CB" *he >I#CB is the rate of money market applicable
to short!term credits among the banks of >ondon" *he reference rate can
e+ually be
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bond markets in all currencies e%cept the apanese /en are +uite free
from any regulation by the respectie goernments" 0traight bonds are
priced with reference to a benchmark, typically treasury issues" *hus a
dollar bond will be priced to a yield a /*& (/ield!to!&aturity)
somewhat aboe the @0 treasury bonds of similar maturity, the spread
depending upon the borrowers ratings and market conditions"
loatation costs of the bond are comparatiely higher than costs indicated
with syndicated credits"
. Commercial aer(C/s)
8ommercial paper is a corporate short!term, unsecured promissory
note issued on a discount to yield basis" 8ommercial paper maturities
generally do not e%ceed 2-; days" 8ommercial paper represents a cheap
and fle%ible source of funds :hile 8
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final holder is paid the face alue on maturity along with the interest" It is
used by the commercial banks as short! term funding instruments"
uro 8s are mainly issued in >ondon by banks" Interest on 8s withmaturity more than a year is paid annually than semi!annually"
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:. International Caital Markets
International 8apital &arkets hae come into e%istence to cater to the
need of international financing by economies in the form of short,
medium or long!term securities or credits" *hese markets also called
markets, are the markets on which currencies, bonds, shares and bills are
tradedHe%changed" Cer the years, there has been a phenomenal growth
both in olume and types of financial instruments transacted in these
markets" currency deposits are the deposits made in a bank, situated
outside the territory of the origin of currency" or e%ample, dollar is a
deposit made in @0 dollars in a bank located outside the @0 banks are
the banks in which currencies are deposited" *hey hae term deposits in
currencies and offer credits in a currency other than that of the country in
which they are located"
distinctie feature of the financial strategy of multinational companies
is the wide range of e%ternal serices of funds that they use on an ongoing
basis" #ritish *elecommunication offers stock in >ondon, .ew /ork and
*okyo, while 0wiss #ank 8orporation!, aided by Italian, #elgian,
8anadian and =erman banks! helps corporations sell 0wiss franc bonds in
urope and then swap the proceeds back into @0 dollars"
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irms hae three general sources of funds aailable6 (i) internally
generatedcash, (ii) short!term e%ternal funds, and (iii) long!term e%ternal
funds" %ternal inestment comes in the form of debt or e+uity, which are
generally negotiable (tradable) instruments" *he pattern of financing
aries from country to country" 8ompanies in the @A get an aerage of
;!-;M of their funds from internal sources" =erman companies get
about 4;!5;M of their funds from e%ternal suppliers" In 19-5, apanese
companies got more than -;M of their money from outside sources, but
this pattern has since reersed maEor chunks of finances come from
internal sources"
nother significant aspect of financing behaiour is that debt accounts for
the oerwhelming share of e%ternal finance" Industry sources of e%ternal
finance also differ widely from country to country" =erman and apanese
companies hae relied heaily on bank borrowing, while the @0 and
#ritish industry raised much more money directly from financial markets
by the sale of securities" Doweer, in all countries, bank borrowing is on
a decline" *here is a growing tendency for corporate borrowing to take
the form of negotiable securities issued in the public capital markets
rather than in the form of commercial bank loans" *his process known as
securitisation is most pronounced among the apanese companies"
;. /etro 2ollar
uring the oil crises of 19-3, the 8apital markets hae played a ery
important role" *hey accepted the dollar deposits from oil e%porters and
channeled the funds to the borrowers in other countries" *his is called
Qrecycling the petrodollarsN"
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issue, maturity and so forth" loatation costs tend to be high" ong!term
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$. 6hat are the ifferent international financial markets
*he international financial markets consist of the credit market, money
market, bond market and e+uity market"
*he international credit market, also called uro credit market, is the
market that deals in medium term uro credit or uro loans"
International banks and their clients comprise the urocurrency market
and form the core of the international money market" *here are seeralother money market instruments such as the uro 8ommercial
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and how preiously issued common stock is traded between inestors in
the secondary markets"
International Financial Market% (general% can 3e 'se in any)
*he last two decades hae witnessed the emergence of a ast financial
market across national boundaries enabling massie cross!border capital
flows from those who hae surplus funds and a search of high returns to
those seeking low!cost funding" *he degree of mobility of capital, the
global dispersal of the finance industry and the enormous diersity of
markets and instruments, which a firm seeking funds can tap, is
something new"
&aEor C8 (Crgani$ation for conomic 8o!operation and
eelopment) countries had began deregulating and liberali$ing their
financial markets towards the end of seenties" :hile the process was far
from smooth, the oerall trend was in the direction of relaxation of
controls, which till then had compartmentali$ed the global financial
markets" %change and capital controls were gradually remoed, non!
residents were allowed freer access to national capital markets and
foreign banks and financial institutions were permitted to establish their
presence in the arious national markets"
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:hile opening up of the domestic markets began only around the end of
seenties, a truly international financial market had already been born in
the mid!fifties and gradually grown in si$e and scope during si%ties and
seenties" *his refers to the uro currencies &arket where borrower
(inestor) from country could raise (place) funds from (with) financial
institutions located in country #, denominated in the currency of country
8" uring the eighties and nineties, this market grew further in si$e,
geographical scope and diersity of funding instruments" It is no more a
'euro' market but a part of the general category called Roffshore
marketsS"
longside liberali$ation, other +ualitatie changes hae been taking place
in the global financial markets" Bemoal of restrictions has resulted into
geographical integrationof the maEor financial markets in the C8
countries" =radually this trend is spreading to deeloping countries many
of which hae opened up their markets!at least partially!to non!resident
inestors, borrowers and financial institutions"
nother noticeable trend is functional integration" *he traditional
distinctions between different financial institutions!commercial banks,
inestment banks, finance companies, etc"! are giing way to diersified
entities that offer the full range of financial serices" *he early part of
eighties saw the process of disintermediation get underway" Dighly rated
issuers began approaching inestors directly rather than going through the
bank loan route"
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Cn the other side, debt crisis in the deeloping countries, adoption of
capital ade+uacy norms and intense competition, forced commercial
banks to reali$e that their traditional business of accepting deposits and
making loans was not enough to guarantee their long!term surial and
growth" *hey began looking for new products and markets" 8oncurrently,
the international financial enironment was becoming more olatile!
there were fluctuations in interest and e%change rates" *hese forces gae
rise to innovative forms of funding instrumentsand tremendous adances
in risk management" *he decade saw increasing actiity in and
sophistication of the deriatiesN market, which had begun emerging in
the seenties"
*aken together, these deelopments hae gien rise to a globally
integrated financial marketplace in which entities in need of short! or
long!term funding hae a much wider choice than before in terms of
market segment, maturity, currency of denomination, interest rate basis,
incorporating special features and so forth" *he same fle%ibility is
aailable to inestors to structure their portfolios in line with their risk!
return tradeoffs and e%pectations regarding interest rates, e%change rates,
stock markets andcommodity prices"
. -ist o't the gro5th an f'nctions of c'rrency markets
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:hile opening up of the domestic markets began only around the end of
seenties, a truly international financial market had already been born in
the mid!fifties and gradually grown in si$e and scope during si%ties and
seenties" *his refers to the well!known Qurocurrencies &arketN" It is the
largest offshore market"
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1" uring the 195;s, the erstwhile @00B was earning dollars from the
sale of gold and other commodities and wanted to use them to buy
grain and other products from the :est, mainly from the @0"
Doweer, they did not want to keep these dollars on deposit with
banks in .ew /ork, as they were apprehensie that the @0
goernment might free$e the deposits if the cold war intensified" *hey
approached banks in #ritain and rance who accepted these dollar
deposits and inested them partly in @0"
2" omestic banks in @0 (as in many other countries) were subEected
to resere re+uirements, which meant that a part of their deposits were
locked up in relatiely low yielding assets"
3" *he importance of the dollar as a ehicle currency in international
trade and finance increased, so many uropean corporations had cash
flows in dollars and hence temporary dollar surpluses" ue to distance
and time $one problems as well as their greater familiarity with
uropean banks, these companies preferred to keep their surplus
dollars in uropean banks, a choice made more attractie by the
higher rates offered by uro banks"
*he main factors behind the emergence and strong growth of the
urodollar markets were the regulations on borrowers and lenders
imposed by the @0 authorities which motiated both banks and
borrowers to eole urodollar deposits and loans" dded to this are the
considerations mentioned aboe, i$" the ability of uro banks to offer
better rates both to the depositors and the borrowers and conenience of
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dealing with a bank that is closer to home, who is familiar with business
culture and practices in urope"
0DCB* .C*0
#. /articiants in International /ro*ect Financing a) Sonsors 3)
-eners
0ponsors
*hese are partners in the proEect who bring in the e+uity capital or risk
capital" #eing so, they are keenly interested in the successful completion
of the proEect and shoulder maEor responsibilities as regards its e%ecution"
*he fact that they bring in the e+uity capital is an indication of their
interest" lso the amount of e+uity that they bring has a marked bearing
on the e%tent of debt that can be raised for the proEect"
0ometimes people who bring in the e+uity capital are Eust the initiators of
the proEect" Included in this category are multinational firms, future
buyers of products or serices of the proEect, the public or priate
inestors, international organisations, deelopment banks etc"
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>enders
*hey bring in the debt capital" inancing of a big proEect necessitates
interention of a banking pool consortium composed of banks, national orinternational financial institutions, e%port financing institutions etc"
=uarantors
=uarantees maybe proided by banks, public financing organisations,
international financial institutions, priate insurance companies etc"
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financial risk are degree of indebtedness, the terms and conditions of
repayment of debt and currency used"
0ome proEects will hae e%penses and reenues that inole seeral
currencies" s a result the e%change rate risk is ery high"
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consumer preferences, etc" Ideally, a pure domestic firm is affected only
by domestic economic conditions ! the domestic economic risk" Doweer,
in today?s integrated world economy, the concept of a pure domestic firm
has less practical releance" &any firms that appear strictly pure domestic
confront foreign economic risk indirectly" ("g"6 local restaurantHdept
store, real estate agent)
4"
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! Identifying political risk and its likely conse+uences
! eeloping policies in adance to cope with the possibility of political
risk
! 0trengthening a firm?s bargaining position
! eising measures to ma%imi$e compensation in the eent of
e%propriation
8ountry Bisk6 It refers to elements of risk inherent in doing business in
the economic, social, and political enironment of another country"
5" 8ounter party Bisk ! *he risk that a counter party will default on a
financial obligation"
" >i+uidity Bisk !*he risk that a financial position cannot be sold
+uickly at preailing prices"
-" eliery Bisk ! *he risk that a buyer will not delier payment of
funds after a seller has deliered securities or foreign e%change that
were purchased"
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7" Bolloer Bisk ! *he risk of being closed out from a financial market
and unable to renew (or roll oer) a short!term contract"
=. Cther risks ! Cther risks relate to the risk of cost oerruns and bad
management"
$. Financing of M+Cs in local or international market
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2" In another type of financing, both the lender and the promoter share
the risk" *he problem sometimes encountered in this method is todecide the proportion in which the risk is to be shared between two
parties"
2omestic 40s offshore markets
inancial assets and liabilities denominated in a particular currency ! say
the 0wiss ranc ! are traded are primarily in the national financial
markets of that country" *hese financial markets are known as Qomestic
&arketsN"
In case of many conertible currencies they are traded in the financial
markets outside the country of that currency" *hese financial markets are
known as QCffshore &arketsN"
:hile it is true that neither both markets will offer both the financing
options nor any entity can access all segments of a particular market, it is
true generally that a gien entity has an access to both the segments of the
markets for placing as well as raising funds"
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*here are theories by e%perts that suggest that there are no two types of
financial markets (vi$'omestic and offshore markets) but eerything is apart of single Q=lobal inancial &arketN"
0imilarity
%perts suggest that QarbitrageN will ensure that both these markets will be
closely linked together in terms of costs of funding and returns on assets'
ifferences
#oth of these markets significantly differ on the QBegulatory dimensionN"
&aEor segments of the domestic markets are subEect to strict superision
by the releant authorities such as 08 in @0, &inistry of inance in
apan and the 0wiss .ational #ank in 0wit$erland" *hese authorities
regulate foreign (non!resident) entitiesN access to the public capital
markets in their countries by laying down eligibility criteria, disclosure J
accounting norms and registration J rating re+uirements (similarly for
domestic banks, resere re+uirements and deposit insurance)"
*he offshore markets on the other hand hae minimal regulation and
often no registration"
inally it must be noted that though the nature of regulation continues to
distinguish omestic from the offshore markets, there are segments like
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Cer the years, these markets hae eoled a ariety of instruments other
than time deposits and short!term loans, e"g" certificates of deposit (8s),
euro commercial paper (8
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oreign #ond &arket and
#ond &arket
oreign #ond6 issue is one offered by a foreign borrower to the inestors
in a national capital market and denominated in that nations currency" n
e%ample is =erman &.8 issuing dollar denominated bonds to the @"0"
inestors"
#ond6 issue is one denominated in a particular currency but sold to
inestors in national capital markets other than the country that issued the
denominating currency" n e%ample is a utch borrower issuing &!
denominated bonds to inestors in the @A, 0wit$erland and the
.etherlands"
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