1. 1 Multinational Financial Management Alan Shapiro 10 th Edition John Wiley & Sons, Inc. PowerPoints by Joseph F. Greco, Ph.D. California State University, Fullerton

2. CHAPTER 13 The Euromarkets

3. 3 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$

4. 4 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.

5. 5 THE EUROCURRENCY MARKETS C.Eurodollar Creation involves 1.A chain of deposits 2.Changing control/usage of deposit

6. 6 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.

7. 7 THE EUROCURRENCY MARKETS 4.Multicurrency Clauses a. Clause gives borrower option to switch currency of loan at rollover. b. Reduces exchange rate risk

8. 8 THE EUROCURRENCY MARKETS 5.Domestic vs. Eurocurrency Markets a. Closely linked rates by arbitrage b. Euro rates: tend to lower lending, higher deposit

9. 9 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

10. 10 EUROBONDS 3. Links to Domestic Bond Markets: arbitrage has eliminated interest rate differential 4. Placement underwritten by syndicates of banks

11. 11 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.

12. 12 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

13. 13 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

14. 14 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

15. 15 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

16. 16 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

17. 17 EURO-COMMERCIAL PAPER 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.

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