International Financial MarketInternational Financial Market

Sources of Capital

• International Market: business operation

• External Market:– A. Domestic Market: domestic funds for domestic use.

– B. International Market: domestic funds for foreign use.

– C. International Market: foreign funds for domestic use.

– D. Offshore Market: foreign funds for foreign use

ie. London, N.Y., Tokyo, Zurich, Singapore, Bahrain, Bahamas.

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Eurodollar vs Eurocurrencies Market

• U.S. Dollar time deposits in a bank outside the U.S.A.

• Bank may be foreign bank or overseas branch of a U.S. bank.

• Deposits could be in: Call Money, Overnight Draft, 3-month CD.

Eurodollar deposits are not demand deposit and can’t be transferred by a check drawn on the bank having the deposit. It can be transferred by a wire or cable from a balance-hold in a corresponding bank located in the U.S.

Banks in which Eurodollar or Eurocurrencies are deposited are generally called Eurobanks.

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1. Convenient money market1. Convenient money market

2. Major source of short-term bank loans2. Major source of short-term bank loans

3. Arbitrage purpose3. Arbitrage purpose

4. U.S. long-time trade deficit4. U.S. long-time trade deficit

5. Money regulation in the U.S.5. Money regulation in the U.S.

6. Military expenses of the 1960’s and 1970’s6. Military expenses of the 1960’s and 1970’s

7. Freezing of foreign assets in the U.S. in the 1970’s and 7. Freezing of foreign assets in the U.S. in the 1970’s and 1980’s1980’s

Reasons for Existence of Eurodollar Reasons for Existence of Eurodollar MarketMarket

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Size of the MarketSize of the Market

• According to the report by Bank for International Settlement, the size of the market has increased 4 times since the 1970’s to $2,056 billion.

• A Majority of the dollar deposits are in Europe (60%), and the rest are in Asia -- mainly in Japan and Singapore.

• The Expansion of the market is very similar to the money creation principle of a commercial bank.

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• Money Market (Euro-Line of Credit, Money Market (Euro-Line of Credit, Revolving Credit, Syndicated Short-term Revolving Credit, Syndicated Short-term and Medium-term loans) and Medium-term loans)

• Euro-CD, such as Spot Rate CD, Roll-over Euro-CD, such as Spot Rate CD, Roll-over Credit where the interest is paid in Credit where the interest is paid in floating rate and TAPS, CD’s for less than floating rate and TAPS, CD’s for less than a year with min $25,000 denomination a year with min $25,000 denomination which could be in a series of identical CD’s which could be in a series of identical CD’s (Tranche) or single issue, and Five-(Tranche) or single issue, and Five-currency CD (denominated in a basket of currency CD (denominated in a basket of five different currencies).five different currencies).

Euro-capital MarketEuro-capital Market

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Eurobonds1. The Euronote Market: short to medium-term 1. The Euronote Market: short to medium-term

debt instruments (negotiable promissory debt instruments (negotiable promissory notes) sold in the Eurocurrency market.notes) sold in the Eurocurrency market.– They are underwritten by different facilities, such as

Revolving Underwriting Facilities (RUF), Note Insurance Facilities (NIF) and Standby Note Issuance Facilities (SNIF).

2. Euro-commercial Papers (ECP) - one, three and six-month maturities.

3. Euro Medium-term Notes (EMTN): bridges maturity gap between ECP and Eurobond.

4. Euro-bond Market– Straight Fixed Rate Issue -fixed CR, specified maturity date and full

principal repayment upon final maturity.

– Floating Rate Notes (FRN) - semiannual coupon, variable rate, fixed maturity or perpetuities.

– Euro-Equity Convertibles - similar to straight bond with added feature to convert to a certain number of stocks prior to maturity.

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Eurobonds Eurobonds 4. Euro-bond Market (con...)

– Dual currency Bonds - purchase price and coupon denominated in one currency and the principal redemption value fixed in a second currency.

– Currency Cocktail Bond - denominated in one of several currency baskets such as SDR or ECU; stable interest and principal payments.

– Stripped Bond - deep discounted bond issued in bearer form in order to sell them to non-residents; Certificate of Accrual on Treasury Securities (CATS).

5. Yankee Bond - issued by non-residents in U.S. Dollars sold in the U.S.

6. Foreign Bond - issued by non-residents in non-Dollars sold in the U.S.

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Eurobonds Eurobonds

• 7. Treasury Bond - long-term obligation of federal government (U.S.)

• 8. Corporate Bond (General, Debenture, Jr, Subordinate) - long-term obligation of corporation.

• 9. Municipal Bond - long-term obligation of state and local government.

• 10. Interest and Currency Swaps

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