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Multinational Financial Management
Alan Shapiro
10th Edition
John Wiley & Sons, Inc.
PowerPoints by
Joseph F. Greco, Ph.D.
California State University, Fullerton
1
CHAPTER 13
The Euromarkets
THE EUROCURRENCY
MARKETS
I.
THE EUROMARKETS
-the most obvious example of the globalization of
financial markets
A. The Eurocurrency Market
1. Composed of eurobanks who accept/maintain
deposits of foreign currency
2. Dominant currency: US$
3
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.
4
THE EUROCURRENCY
MARKETS
C.
Eurodollar Creation involves
1. A chain of deposits
2. Changing control/usage of deposit
5
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.
6
THE EUROCURRENCY MARKETS
4. Multicurrency Clauses
a. Clause gives borrower option to switch
currency of loan at rollover.
b. Reduces exchange rate risk
7
THE EUROCURRENCY
MARKETS
5.
Domestic vs. Eurocurrency Markets
a. Closely linked rates by arbitrage
b. Euro rates: tend to lower lending,
higher deposit
8
EUROBONDS
A. DEFINITION OF EUROBONDS
bonds sold outside the country of currency
denomination
1. a financial instrument which gives 2 parties the
right to exchange streams of income over time
2. Recent Substantial Market Growth
due to use of swaps
9
EUROBONDS
3. Links to Domestic Bond Markets:
arbitrage has eliminated interest rate differential
4. Placement
underwritten by syndicates of banks
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EUROBONDS
5. Currency Denomination
a. Most often US$
b. “Cocktails” allow a basket of
currencies
6. Eurobond Secondary Market
-result of rising investor demand
7. Retirement
a. sinking fund usually
b. some carry call provisions.
11
EUROBONDS
8. Ratings
a.
According to relative risk
b.
Rating Agencies
Moody’s, Standard & Poor
9. Rationale For Market Existence
a.
Eurobonds avoid government
regulation
b.
May fade as market deregulate
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EUROBONDS
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
13
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
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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
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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 are not bank underwritten
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EURO-COMMERCIAL PAPER
B. U.S. vs. Euro-CPs
1.
2.
3.
Average maturity longer (2x)
for Euro-CPs
Secondary market for Euro;
not U.S. CPs.
Smaller fraction of Euro use
credit rating services to rate.
17
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John Wiley & Sons, Inc.
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