1
Multinational Financial
Management
Alan Shapiro
7th
Edition
J.Wiley & Sons
Power Points by
Joseph F. Greco, Ph.D.
Califo...
2
CHAPTER 13
THE EUROMARKETS
www.StudsPlanet.com
3
CHAPTER OVERVIEW:
I. THE EUROCURRENCY MARKETS
II. EUROBONDS
III.NOTE ISSUANCE FACILITIES AND
EURONOTES
IV. EUOR COMMERCI...
4
I. THE EUROCURRENCY
MARKETS
THE EUROMARKETS
-the most important international
financial markets today.
A. The Eurocurren...
5
THE EUROCURRENCY MARKETS
B.Growth of Eurodollar Market
caused by restrictive US government
policies, especially
1. Reser...
6
THE EUROCURRENCY MARKETS
C. Eurodollar Creation involves
1. A chain of deposits
2. Changing control/usage of
deposit
www...
7
THE EUROCURRENCY MARKETS
3.Eurocurrency loans
a. Use London Interbank Offer
Rate: LIBOR as basic rate
b. Six month rollo...
8
THE EUROCURRENCY MARKETS
4. Multicurrency Clauses
a. Clause gives borrower option to
switch currency of loan at
rollover...
9
THE EUROCURRENCY MARKETS
5.Domestic vs. Eurocurrency Markets
a. Closely linked rates by
arbitrage
b. Euro rates: tend to...
10
II. EUROBONDS
A. DEFINITION OF EUROBONDS
bonds sold outside the country of
currency denomination.
1. Recent Substantial...
11
EUROBONDS
2. Links to Domestic Bond Markets
arbitrage has eliminated interest
rate differential.
3. Placement
underwrit...
12
EUROBONDS
4. Currency Denomination
a. Most often US$
b. “Cocktails” allow a basket of
currencies
5. Eurobond Secondary ...
13
EUROBONDS
7. Ratings
a. According to relative risk
b. Rating Agencies
Moody’s, Standard & Poor
8. Rationale For Market ...
14
THE EUROMARKETS
B. Eurobond vs. Eurocurrency Loans
1. Five Differences
a. Eurocurrency loans use variable
rates
b. Loan...
15
III. NOTE ISSUANCE FACILITIES
AND EURONOTES
A. Note Issuance Facility (NIF)
1. Low-cost substitute for loan
2. Allows b...
16
NOTE ISSUANCE FACILITIES AND
EURONOTES
B. NIFs vs. Eurobonds
1. Differences:
a. Notes draw down credit as needed
b. Not...
17
IV. EURO-COMMERCIAL PAPER
I. SHORT-TERM FINANCING
A. Euronotes and Euro-Commercial
Paper
1. Euronotes
unsecured short-t...
18
EURO-COMMERCIAL PAPER
B. U.S. vs. Euro-CPs
1. Average maturity longer (2x)
for Euro-CPs
2. Secondary market for Euro;
n...
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Eurobonds

  1. 1. 1 Multinational Financial Management Alan Shapiro 7th Edition J.Wiley & Sons Power Points by Joseph F. Greco, Ph.D. California State University, Fullerton www.StudsPlanet.com
  2. 2. 2 CHAPTER 13 THE EUROMARKETS www.StudsPlanet.com
  3. 3. 3 CHAPTER OVERVIEW: I. THE EUROCURRENCY MARKETS II. EUROBONDS III.NOTE ISSUANCE FACILITIES AND EURONOTES IV. EUOR COMMERCIAL PAPER V. THE ASIA CURRENCY MARKETS www.StudsPlanet.com
  4. 4. 4 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 currency 2. Dominant currency: US$ www.StudsPlanet.com
  5. 5. 5 THE EUROCURRENCY MARKETS B.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. www.StudsPlanet.com
  6. 6. 6 THE EUROCURRENCY MARKETS C. Eurodollar Creation involves 1. A chain of deposits 2. Changing control/usage of deposit www.StudsPlanet.com
  7. 7. 7 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. www.StudsPlanet.com
  8. 8. 8 THE EUROCURRENCY MARKETS 4. Multicurrency Clauses a. Clause gives borrower option to switch currency of loan at rollover. b. Reduces exchange rate risk www.StudsPlanet.com
  9. 9. 9 THE EUROCURRENCY MARKETS 5.Domestic vs. Eurocurrency Markets a. Closely linked rates by arbitrage b. Euro rates: tend to lower lending, higher deposit www.StudsPlanet.com
  10. 10. 10 II. EUROBONDS A. 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. www.StudsPlanet.com
  11. 11. 11 EUROBONDS 2. Links to Domestic Bond Markets arbitrage has eliminated interest rate differential. 3. Placement underwritten by syndicates of banks www.StudsPlanet.com
  12. 12. 12 EUROBONDS 4. Currency Denomination a. Most often US$ b. “Cocktails” allow a basket of currencies 5. Eurobond Secondary Market -result of rising investor demand 6. Retirement a. sinking fund usually b. some carry call provisions. www.StudsPlanet.com
  13. 13. 13 EUROBONDS 7. Ratings a. According to relative risk b. Rating Agencies Moody’s, Standard & Poor 8. Rationale For Market Existence a. Eurobonds avoid government regulation b. May fade as market deregulate www.StudsPlanet.com
  14. 14. 14 THE EUROMARKETS B. 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 faster www.StudsPlanet.com
  15. 15. 15 III. NOTE ISSUANCE FACILITIES AND EURONOTES A. Note Issuance Facility (NIF) 1. Low-cost substitute for loan 2. Allows borrowers to issue own notes 3. Placed/distributed by banks www.StudsPlanet.com
  16. 16. 16 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 www.StudsPlanet.com
  17. 17. 17 IV. 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 not bank underwrittenwww.StudsPlanet.com
  18. 18. 18 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. www.StudsPlanet.com
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