International financial market & instruments module 3

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International financial market & instruments module 3

  1. 1. 1
  2. 2. Introduction  A financial market is the mechanism that facilitates the transfer of funds from lenders (surplus units) to borrowers (deficit units).  The institutions & instruments are integral part of financial market.  When funds flow across national boundaries and the transfer is between parties residing in different countries, there comes into existence the international financial markets. 2
  3. 3. Motives for internationalization of financial transactions  Difference in interest rates  International diversification  Economic growth prospects  Exchange rate fluctuations 3
  4. 4. Sources of international funds  Multilateral development banks or agencies  Government/governmental agencies  International banks  Securities markets 4
  5. 5. Segments of International Financial Markets  International Bond Market  International Equity Market  International Money Market  International Credit Market  Foreign Exchange Market 5
  6. 6. Types International bonds         Foreign bonds & euro bonds Global bonds Straight bonds Floating rate notes Convertible bonds Cocktail bonds Callable and puttable bonds Sinking fund bonds 6
  7. 7. Foreign bonds & euro bonds  Foreign bonds are underwritten by the underwriters of the country where they are issued  Maturity based on the need of investors of a particular country.  Foreign bonds are subjected to government regulations in the country where they are issued. 7
  8. 8. DIFFERENCES Foreign Bond Euro Bond  If an Indian company issue  But in case of euro bonds bond in the New-York and bond is dominated in US dollar, such Bonds are called foreign bonds.  Foreign bonds underwritten by the underwriters of the country where they issued. they are dominated in currency other than the currency of the country where the bonds are issued.  Euro bonds underwritten by the underwriters of multi nationality 8
  9. 9. DIFFERENCES Foreign Bond Euro Bond  Foreign bonds subjected to  Euro bonds are free from governmental rules and regulations  Foreign bonds is determined keeping in mind the investors of a particular country. rules and regulations.  Euro bond are tailored to the needs of the multinational investors. 9
  10. 10. Global bonds  First it issued in 1989 by world bank  It also issued by the company  It dominated in 7 country’s currency  Australian dollar  Canadian dollar  Japanese yen  Swidish crona  Euro 10
  11. 11. Features Eurobonds  underwritten by an internationally.  offered simultaneously to investors in a number of countries .  issued outside the jurisdiction of any single country.  they are not registered through a regulatory agency.  Make coupon payments annually.  Large in size offered for simultaneous placement in different countries 11
  12. 12. Global bonds  Bonds that can be offered within the euro market and several other markets simultaneously.  Unlike Euro bonds, global bonds can be issued in the same currency as the country of issuance.  For example, a global bond could be both issued in the United States and denominated in U.S. dollars. 12
  13. 13. Straight bonds  Interest rate is fixed known as coupon rate  It is a traditional type of bond Its varities:      -Bullet-redemption bond -Rising-coupon bond -Zero-coupon bond -Currency options -Bull and bear bonds. -Debt warrant bonds 13
  14. 14. Floating rate notes  Does not carry fixed rate of interest  Interest quoted as a premium or discount to a        reference rate(LIBOR) Interest rate revised periodically. Perpetual FRNs Minimax FRN Drop lock FRN Flip flop FRN Mismatch FRN Hybrid fixed rate reverse FRN 14
  15. 15. Convertible bonds  Convertible into equity shares  Some convertible bonds have detachable warrants involving acquisition rights  Automatic convertibility into a specified number of shares. 15
  16. 16. Cocktail bonds  Denominated in a mixture of currencies.  Represent a weighted average of 5 currencies  Investors get currency diversification risk  Depreciation offset by appreciation of other. 16
  17. 17. ADR’S  Represents ownership in the shares of a non-U.S.       company that trades in U.S. financial markets ADRs carry prices in US dollars, pay dividends in US dollars, And can be traded like the shares of US-based companies. JPMorgan Citibank Deutsche Bank Bank of New York Mellon 17
  18. 18. GDR’S  Global Depository Receipt (GDR) - certificate     issued by international bank, which can be subject of worldwide circulation on capital markets. GDR's are emitted by banks, which purchase shares of foreign companies and deposit it on the accounts. Global Depository Receipt facilitates trade of shares, especially those from emerging markets. Prices of GDR's are often close to values of related shares. Very similar to GDR's are ADR's. 18
  19. 19. Procedure of issue  Deciding the size of the issue , the market of the issue      , price of the issue and the formalities involved. Approaching a lead manager Fulfilling the formalities and preparing the prospectus. Depositing shares to be issued with the custodian Custodian asks depository located in foreign country to issue DR Proceeds flow from depository to custodian bank to issuing company 19
  20. 20. Documentation  1. The prospectus  2.The depository agreement  3.The agreement between the custodian and depository.  4.The underwriting agreement  5.A copy of the agreement with the listing stock exchange. 20
  21. 21. Types International Money Market Instruments  Euro notes  Euro commercial paper  Medium term euro notes  Certificate of Deposit  Bankers’ acceptance (BA) 21
  22. 22. Euro notes  Like PNs for obtaining short term funds.  Denominated in any currency other than the currency of the country where they are issued.  Documentation facilities are minimum.  Represent Low cost funding route.  Investor too prefer them in view of short maturity. 22
  23. 23. Euro commercial notes  A short-term, debt instrument  Corporations issue euro commercial papers in order to tap into the international money markets for their financing.  An example of a euro commercial paper is a British firm issuing debt in U.S. dollars to encourage investment from dollar-investors in international money markets. 23
  24. 24. Medium term euro notes  Longer maturity between 1 year to 5 years.  Short term euro notes are allowed to roll over.  Issued to get medium term funds in foreign currency without any need for redemption and fresh issue.  It is not underwritten yet there is provision for underwriting.  It carry fixed interest rate 24
  25. 25. Types Medium Term Notes  Euro Medium Term Notes (EMTNs)  Global Medium Term Notes (GMTNs) 25
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