ibo-06_international business finance Unit 02_international financial markets

International Business Finance
By : Jaswant Sen

Block – 1
Unit - 2
International Financial
Markets
International Business Finance

Topics to be covered
• Introduction
• International Financial Centres
• The Euro Market
• International Debt Instruments
• Euro Equities
• Euro Convertible Bonds
• Euro issues in India
• Summary
JASWANT SEN (UGC-NET) 92-7879-4057

Introduction
• After studying this unit you should be able to
explain
• International financial markets and
• Euro markets
• Explain the concept of LIBOR,
• Describe various international financial
instruments used for raising finance
• Have an overview of Indian Euro issues

International Financial Market
• The International Financial Market is the place
where financial wealth is traded between
individuals (and between countries). It can be
seen as a wide set of rules and institutions
where assets are traded between agents in
surplus and agents in deficit and where
institutions lay down the rules.

• International financial markets and operations
comprise exchange deals i.e.. buying/selling
currencies; banking transactions i.e., deposit
taking and lending; and capital market
operations i.e., issuance of securities.
• According to the nature of financial
operations
• Money market : deposit and taking lending
• Capital market : issuance of securities
• Equity market : issuance of international
equities

Financial Market
Money
Markets
• Exchange or
exchange
related
transactions
Credit
Markets
• Deposit
taking and
lending
Capital
Markets
• Issuance of
securities
Equity
Markets
• Issuance of
international
equities.
Classification of Financial Markets according to the
nature of financial operations

International
Market
Money
market
Maturity period < 1 year
Capital
market
Maturity period > 1 year

International Financial Market (Cont..)
• The growth of international financial
markets has facilitated cross-country flows
which contribute to a more efficient
allocation of resources.
• The most important international financial
centres are
• London,
• Tokyo and
• New York

International Financial Market (Cont..)
• The markets of Switzerland, Luxembourg,
Singapore, Hong Kong and the Bahamas
serve as financial "entrepots". These
markets serve as financial intermediaries
between non-resident suppliers of funds
and non-resident users of funds.

Euro Market
Euro markets consist of banks (Euro banks)
that offer wholesale deposits and loans in
favourable jurisdictions (Euro markets) and
in a variety of currencies, usually other than
that of the country in which the banks are
located.

Euro Market (Cont..)
Why do the Euro Markets Thrive?
• The Euro markets thrived and grew because
national. money markets were hobbled with
regulations such as interest rate controls,
reserve requirements and deposit insurance
costs. The major currencies in the recent years
have however gained enough non-resident
convertibility that a Euro market segment was
able to rise.

Why do the Euro Markets Thrive?
• Euro banks can offer higher yields to depositors
and finer rates to borrowers, this makes the Euro
markets an attractive market for depositing
money as well as a source for borrowings.
• Domestic (National) markets and Euro markets
can thus be considered perfect Substitutes for
each other. The domestic and Euro markets thus
create opportunities for Arbitrage operation; i.e.,
profiting from price differences when the same
asset (currency) is traded in different markets.

London Inter-Bank Offered Rate (LIBOR)
• LIBOR is the benchmark interest
rate that banks charge each other for
overnight, one-month, three-month, six-
month and one-year loans. It's the
benchmark for bank rates all over the
world. LIBOR is an acronym for London
Inter-Bank Offered Rate.

LIBOR
• A large volume of Eurodollar lending involves the
London Interbank Offered Rate.
• LIBOR can be defined in two ways:
• The rate at which funds are offered to a first
class bank in London for a specific maturity
period;
• The rate at which a first claw bank in London
offers funds to another first class bank in
London

LIBOR
• Libor is usually fixed at a time specified (normally
11am London time) and invariably specified in
lending/borrowing agreements. It is quoted for
deposits starting from the spot date for various
periods, of which the most common are 3 and 6
months
• It is used to guide banks in setting
rates for adjustable-rate loans, including interest-
only mortgages and credit card debt. Lenders
typically add a point or two to create a profit. The
BBA estimated that $10 trillion in loans were
affected by the LIBOR rate.

International Debt Instruments
• Euro Notes
• Euro Commercial Paper
• Medium Term Notes
• Floating Rate Notes
• Euro Bonds
• Euro Equities

(Cont..)
Euro Notes
• Euro Notes are like promissory notes issued by
companies for obtaining short term funds.
• It is a debt security with a maturity of less than a few
years traded in the Eurocurrency market.
• Objectives of issuing Euro notes
• Short term maturities, generally 3, 6 or 9 months
• Represents low cost funding route
• Euro note issuance programme
• Revolving Underwriting Facility [RUF] or
• Note - Issuance Facility [NIF]

(Cont..)
• Euro commercial papers
• It is a promissory note like the short term Euro
notes although it is different from Euro notes in
some ways. It is not underwritten, while the Euro
notes are underwritten.
• CP are issued at a discount
• most prominent markets
• United States
• Canada
• UK
• Japan
• Australia

(Cont..)
• Medium Term Notes
• The market for MTN's was established as an
alternative to short term financing in the
Commercial Paper market and long term
borrowings in the Bond market. Hence the
name medium term.
• investor driven
• provides corporations with the ability to raise
funds discreetly

(Cont..)
• Floating Rate Notes
• Floating Rate Notes implies, is an instrument
whose interest rate floats with prevailing
market rates. Like Eurodollars deposits, it pays
a 3 or 6 month interest rate set above or
below LIBOR
• The term Floating Rate Note is taken to mean
an intermediate to long term debt security
whose interest rate is pegged to a short term
rate or rate index and adjusted frequently

(Cont..)
• A Plain Vanilla Floating Rate Notes
• A "plain vanilla" FRN is a fixed-maturity
bond whose reference - rate period
frequency of reset and coupon payment are
all of the same length.
• A mismatch Floating Rate Notes
• A "mismatch" FRN is one in which the reference-
rate period, the frequency of reset, and/or the
coupon payment period are of different lengths.
Let's illustrate mismatch FRN.

(Cont..)
• Euro Bonds
• Euro bonds are usually issued in the market for
the borrower by a syndicate of banks from
different countries and placed in countries
other than the one in whose currency the
bond is denominated
• If the German firm issued a bond in French
francs in England, Switzerland, the issue is a
Euro Bond

(Cont..)
• Euro Bonds is popular choice for
• Medium and long term funds for expansion
• New investments or for acquisition.
• longer term money to fund their loan
portfolios or to increase their capital

(Cont..)
• Repurchasing Euro bonds
• If a company can issue Euro bonds it can also
buy back the bond from the market. One
common reason may be that the borrower is
flushed with funds and no longer needs the
debt.
• Costly and time consuming process

EURO EQUITIES
When a company's shares are made
available internationally, rather than just in
the country where the company is based
these issues are called Euro equity issue
• Equity linked instruments used for raising
money abroad-
• International Depository Receipts

EURO EQUITIES (Cont..)
Depository Receipt
• A Depository Receipt is defined as a negotiable
certificate providing the holder with the
benefit of ownership of equity shares of the
issuer company. Various types of Depository
Receipts are
• American Depository Receipts [ADR's]
• European Depository Receipts [EDR's]
• Global Depository Receipts [GDR's]

EURO EQUITIES (Cont..)
• An ADR (or EDR) is a document evidencing
ownership of a share (or shares) held on
the investors behalf by a US or respective
European based bank in a foreign country
• A GDR is an instrument to raise equity
capital in multiple markets outside the
issuers domestic market through one
security which is traded in a foreign stock
market

EURO CONVERTIBLE BONDS
• Euro Convertible Bond is a quasi equity
issue, outside the domestic market, which
provides the holder with an option to
convert from a debt instrument
(investment) into an equity investment
i.e., to a certain number of equity shares
at a predetermined price.

Euro Issues In India
• The first GDR - Reliance industries in May
92 with an issue size of US$ 150 million.
• The successful ADR issues include
• Infosys Technologies ($ 75 million),
• Satyam Infoway Ltd. ($ 86 million) and
• ICICI ($ 315 million).

Euro Issues In India (Cont..)
• December, 1999 Ministry of Finance
permitted Indian software companies to
acquire foreign software companies and
issue ADRs/GDRs without reference to the
Government of India or the RBI up to the
value limit of US $ 100 million.
• Beyond US $ 100 million, proposals would
require examination by a Special
Composite Committee in the RBI.

Summary
• International financial markets and operations
comprise buying and selling currencies, deposit
taking and lending and issuance of securities.
Money markets deal with exchange or exchange
related transaction, credit markets deals with
deposit taking and lending. Capital markets and
equity markets are concerned with issuance of
securities and issuance of international equities
respectively.

Summary (Cont..)
• Euro market transactions are the financial
transactions Denominated with currency outside
the country of its origin.
• The important instruments that are used to raise
finance are Euro notes, Euro-commercial papers,
Medium-term Notes, Floating Rate Notes, Euro
bonds and Euro equities.

ibo-06_international business finance Unit 02_international financial markets

ibo-06_international business finance Unit 02_international financial markets

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