This chapter discusses the major international financial markets known as the Euromarkets. It covers the Eurocurrency markets, Eurobonds, Note Issuance Facilities, and Euro-commercial paper. The Eurocurrency market is composed of eurobanks that accept deposits in foreign currencies, dominated by US dollars. Eurobonds are bonds sold outside the country of the currency's denomination, often US dollars, and have grown substantially due to interest rate swaps. Note Issuance Facilities allow borrowers to issue their own notes placed by banks as a low-cost substitute for loans. Euro-commercial paper are unsecured short-term debt securities denominated in US dollars and issued by corporations and governments.

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Multinational Financial
Management
Alan Shapiro
7th Edition
J.Wiley & Sons
Power Points by
Joseph F. Greco, Ph.D.
California State University, Fullerton

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CHAPTER 13
THE EUROMARKETS

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CHAPTER OVERVIEW:
I. THE EUROCURRENCY MARKETS
II. EUROBONDS
III.NOTE ISSUANCE FACILITIES AND
EURONOTES
IV. EUOR COMMERCIAL PAPER
V. THE ASIA CURRENCY MARKETS

4. I. THE EUROCURRENCY
MARKETS
THE EUROMARKETS
-the most important international
financial markets today.
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A. The Eurocurrency Market
1. Composed of eurobanks who
accept/maintain deposits of
foreign currency
2. Dominant currency: US$

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.
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6. THE EUROCURRENCY MARKETS
C. Eurodollar Creation involves
1. A chain of deposits
2. Changing control/usage of
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deposit

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.
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8. THE EUROCURRENCY MARKETS
4. Multicurrency Clauses
a. Clause gives borrower option to
switch currency of loan at
rollover.
b. Reduces exchange rate risk
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9. THE EUROCURRENCY MARKETS
5.Domestic vs. Eurocurrency Markets
a. Closely linked rates by
arbitrage
b. Euro rates: tend to lower
lending, higher deposit
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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.

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EUROBONDS
2. Links to Domestic Bond Markets
arbitrage has eliminated interest
rate differential.
3. Placement
underwritten by syndicates of
banks

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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.

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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

14. THE EUROMARKETS
B. Eurobond vs. Eurocurrency Loans
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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

15. III. NOTE ISSUANCE FACILITIES
AND EURONOTES
A. Note Issuance Facility (NIF)
1. Low-cost substitute for loan
2. Allows borrowers to issue own
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notes
3. Placed/distributed by banks

16. NOTE ISSUANCE FACILITIES AND
EURONOTES
B. NIFs vs. Eurobonds
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1. Differences:
a. Notes draw down credit as needed
b. Notes let owners determine timing
c. Notes must be held to maturity

17. IV. EURO-COMMERCIAL PAPER
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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
underwritten

18. EURO-COMMERCIAL PAPER
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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.