International Financial Market
Sources of Capital
• International Market: business operation
• External Market:
–
–
–
–
A.
B.
C.
D.
Domestic Market: domestic funds for domestic use.
International Market: domestic funds for foreign use.
International Market: foreign funds for domestic use.
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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Reasons for Existence of Eurodollar
Market
1.
2.
3.
4.
5.
6.
7.
Convenient money market
Major source of short-term bank loans
Arbitrage purpose
U.S. long-time trade deficit
Money regulation in the U.S.
Military expenses of the 1960’s and 1970’s
Freezing of foreign assets in the U.S. in the 1970’s and
1980’s
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Size 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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Euro-capital Market
• Money Market (Euro-Line of
Credit, Revolving Credit,
Syndicated Short-term and
Medium-term loans)
• Euro-CD, such as Spot Rate CD,
Roll-over Credit where the interest
is paid in floating rate and TAPS,
CD’s for less than a year with min
$25,000 denomination which could
be in a series of identical CD’s
(Tranche) or single issue, and Fivecurrency CD (denominated in a
basket of five different currencies).
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Eurobonds
1. The Euronote Market: short to medium-term debt
instruments (negotiable promissory 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 sixmonth 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
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 nonDollars sold in the U.S.
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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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