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INTERNATIONAL FINANCIAL MARKETS

Note: The prefix ‘Euro’ is somewhat of a misnomer since it does not mean that the
bank/institutions/market has to be located in Europe. A Eurocurrency is a time
deposit of money in an international bank located in a country different from the
country that issued the currency. E.g. Eurodollars are deposits of US Dollars in
banks outside the US, Euro yen are deposits of Japanese Yen in banks outside
Japan.

CONCEPTS

1. Distinction between Euro Credit and Euro Bond Market

Both Euro bonds and Euro credit (Euro currency) financing have their advantages
and disadvantages. For a given company, under specific circumstances, one method
of financing may be preferred to the other. The major differences are:

1. Cost of borrowing
Euro bonds are issued in both fixed rate and floating rate forms. Fixed rate bonds
are an attractive exposure management tool since the known long-term currency
inflows can be offset by the known long-term outflows in the same currency. In
contrast, Euro currency loans carry variable rates.

2. Maturity
Euro bonds have longer maturities while the period of borrowing in the Euro currency
market has tended to lengthen over time.

3. Size of the issue
Earlier, the funds available for lending at any time have been much more in the inter-
bank market than in the bond market. But of late, this situation does not hold true.
Moreover, although in the past the flotation costs of a Euro currency loan have been
much lower than a Euro bond (about 0.5 % of the total loan amount versus about
2.25 % of the face value of a Euro bond issue), compensation has worked to lower
Euro bond flotation costs.

4. Flexibility
In a Euro bond issue, the funds must be drawn in one sum on a fixed date and
repaid according to a fixed schedule, unless the borrower pays a substantial
prepayment penalty. By contrast, the drawdown in a floating rate loan can be
staggered to suit the borrower’s needs and can be repaid in whole or in part at any
time, often without penalty. Moreover, a Euro currency loan with a multi-currency
clause enables the borrower to switch currencies on any roll-over date, whereas
switching the denomination of a Euro bond from currency A to currency B would
require a costly, combined, refunding and reissuing operation.

5. Speed

Since Euro banks accept short-term deposits and provide long-term loans. local authorities. It is the rate charged for loans between Euro Banks. in consultation with the borrower. multinational groups. whether to approach a large market or a restricted number of banks to form the syndicate. a period of two to three weeks should suffice. Several clauses may be introduced in the contract of Euro-debt: • Pari-passu clause that prevents the borrower from contracting new debts that subordinate the interest of lenders. public utilities. • Exchange option clause that allows the withdrawal of a part or totality of loan in another currency. The second (but far behind) is Pound Sterling followed by Deutsch mark. Japanese. National Westminster. Among the borrowers. Swiss. Bankers Trust. the approached bank decides primarily. Barclay's Bank. This document contains the principal terms and conditions of loan. Characteristics of Euro credit A major part (more than 80 %) of the Euro debts is made in US dollars. i. BNP. Before launching syndication. German and Asian (specially that of Singapore) banks. Each of the banks in syndicate lends a part of the loan. objectives of loan and details of the borrower. British. on a strategy to be adopted. A Euro bond financing generally takes more time. a formal document is prepared on behalf of potential borrowers. Participants in Euro credit Market The major lending banks in the Euro credit market are Euro banks.e. The London Inter Bank Offer Rate (LIBOR) is the most commonly used interest rate. French. though the difference is becoming less significant. The market that deals in such loans is called Euro Credit Market. Dealing in Euro credits When a borrower approaches a bank for Euro credit. To avoid this Euro banks often extend floating rate euro credit loans fixed to some market interest rate. Japanese yen.Funds can be raised by a known borrower very quickly in the Euro currency market. Often. Chase Manhattan Bank. there are banks. government agencies. etc. The common maturity for euro credit loans is 5 years. etc. • Negative guarantee clause that commits the borrower not to contract other debts that subordinate the interest of lenders. it is likely that asset liability mismatch may arise. . Chemical Bank. Euro Credit Market Euro credit or Euro Loans are the loans extended for one year or longer. Citicorp. JP Morgan. 2. Swiss franc and others. First National Bank of Chicago. The duration of this operation is normally about 6 to 8 weeks. American.

3. Switzerland and the Netherlands. Euro CPs Commercial paper is a corporate short-term. Numerous techniques allow banks to sell their titles in this market. In 1990. secondary markets tend to be not very active since most investors hold the paper to maturity.8 billion. typically treasury issues. The reference rate can equally be PIBOR at Paris and FIBOR at Frankfurt. etc. It evolved as a natural culmination of the Note Issuance Facility and developed rapidly in an environment of securitisation and disintermediation of traditional banking. Eurobond markets in all currencies except the Japanese Yen are quite free from any regulation by the respective governments. On an average. As far as the upper limits are concerned. CP has also developed in the domestic segments of some European countries offering attractive funding opportunities to resident entities. The rates are available and generally renewable (roll over credit) every six months. increased by a margin (or spread). Commercial paper represents a cheap and flexible source of funds While CPs are negotiable. The emergence of the Euro Commercial Paper (ECP) is much more recent. Euro tunnel borrowed $6. It is revised regularly. maturity periods are of about five years (in some cases it is about 20 years). There is an active secondary market of Euro debts. an Italian borrower. The LIBOR is the rate of money market applicable to short-term credits among the banks of London. unsecured promissory note issued on a discount to yield basis. amounts involved are of as high magnitude as $5 billion and more.Most of the syndicated debts are of the order of $50 million. Thus a Eurodollar bond will be priced to a yield a YTM (Yield-to-Maturity) somewhat above the US treasury bonds of similar maturity. Floatation costs of the Eurobond are comparatively higher than costs indicated with syndicated Eurocredits. fixed with reference to LIBOR. The market has since grown enormously in size and was worth about $ 428 billion in 1994. Commercial paper maturities generally do not exceed 270 days. The reimbursement of the loan may take place in one go (bullet) or in several installments. which is said to have originated in 1963 with an issue of Eurodollar bonds by Autostrade. The margin depends on the supply and demand of the capital as also on the degree of the risk of these credits and the rating of borrowers. Straight bonds are priced with reference to a benchmark. 4. Financial institutions are in vigorous competition. The interest rate on Euro debt is calculated with respect to a rate of reference. The Eurobond market is the largest international bond market. the spread depending upon the borrowers ratings and market conditions. An example is a Dutch borrower issuing DM-denominated bonds to investors in the UK. Euro Bond Market Euro Bond issue is one denominated in a particular currency but sold to investors in national capital markets other than the country that issued the denominating currency. .

There is a growing tendency for corporate borrowing to take the form of negotiable securities issued in the public capital markets rather than in the form of commercial bank loans.helps corporations sell Swiss franc bonds in Europe and then swap the proceeds back into US dollars. This process known as securitisation is most pronounced among the Japanese companies. Euro banks are the banks in which Euro currencies are deposited. Euro bonds. Companies in the UK get an average of 60-70% of their funds from internal sources. Interest on CDs with maturity more than a year is paid annually than semi-annually. The final holder is paid the face value on maturity along with the interest. Euro CDs are mainly issued in London by banks. German companies get about 40-50% of their funds from external suppliers. major chunks of finances come from internal sources. Firms have three general sources of funds available: (i) internally generated cash. External investment comes in the form of debt or equity. Euro shares and Euro bills are traded/exchanged. A CD is a marketable instrument so that the investor can dispose it off in the secondary market whenever cash is needed. International Capital Markets International Capital Markets have come into existence to cater to the need of international financing by economies in the form of short. bank borrowing is on a decline. but this pattern has since reversed. Belgian. . New York and Tokyo. Japanese companies got more than 70% of their money from outside sources. British Telecommunication offers stock in London. likewise. Canadian and German banks. In 1975. Industry sources of external finance also differ widely from country to country. These markets also called Euro markets. Over the years. For example. Euro dollar is a deposit made in US dollars in a bank located outside the USA. which are generally negotiable (tradable) instruments. are the markets on which Euro currencies.5. while the US and British industry raised much more money directly from financial markets by the sale of securities. A distinctive feature of the financial strategy of multinational companies is the wide range of external services of funds that they use on an ongoing basis. there has been a phenomenal growth both in volume and types of financial instruments transacted in these markets. They have term deposits in Euro currencies and offer credits in a currency other than that of the country in which they are located. situated outside the territory of the origin of currency. Another significant aspect of financing behaviour is that debt accounts for the overwhelming share of external finance. However. Euro CDs A Certificate of Deposit (CD) is a negotiable instrument evidencing a deposit with a bank. German and Japanese companies have relied heavily on bank borrowing. in all countries. and (iii) long-term external funds. Euro currency deposits are the deposits made in a bank. The pattern of financing varies from country to country. It is used by the commercial banks as short. 6. (ii) short-term external funds. while Swiss Bank Corporation-. aided by Italian. medium or long-term securities or credits.term funding instruments.

maturity and so forth. Their higher credit risk means that "junk" bond yields are higher than bonds of better credit quality. Studies have demonstrated that portfolios of high yield bonds have higher returns than other bond portfolios. the sale of junk bonds continued to be used in the 1990s to generate capital 9. the issuer pays the investor a higher interest rate. the Capital markets have played a very important role. Floatation costs tend to be high. Samurai Bonds They are publicly issued yen denominated bonds. suggesting that the higher yields more than compensate for their additional default risk. 10. These specify the minimum rating. size of issue. They are issued by non-Japanese entities. dual rating and other listing requirements.7. Shogun / Geisha Bonds They are publicly floated bonds in a foreign currency while Geisha are their private counterparts. This is called ‘recycling the petrodollars’. when they were used to help finance the purchase of companies. Shibosai Bonds They are private placement bonds with distribution limited to banks and institutions. In exchange for the risk of lending money to a bond issuer with bad credit. It is the largest and most active market in the world but potential borrowers must meet very stringent disclosure. Pricing is done with respect to Long-term Prime Rate. maturity and so forth. The eligibility criteria are less stringent but the MOF still maintains control. Petro Dollar During the oil crises of 1973. options like call and put can be incorporated and there are no restrictions on size of the issue. Yankee Bonds These are dollar denominated bonds issued by foreign borrowers. "High-yield bond" is a nicer name for junk bond The credit rating of a high yield bond is considered "speculative" grade or below "investment grade". The Japanese Ministry of Finance lays down the eligibility guidelines for potential foreign borrowers. This means that the chance of default with high yield bonds is higher than for other bonds. They accepted the dollar deposits from oil exporters and channeled the funds to the borrowers in other countries. . 8. Junk Bonds A junk bond is issued by a corporation or municipality with a bad credit rating. Junk bonds became a common means for raising business capital in the 1980s. especially by leveraged buyouts.

This would result in gross cross- border financial flows. the former attempting to maximize the return on their savings while the latter looking to minimize their borrowing costs. Finally low rated or unrated borrowers can make private placements. the massive surpluses of the OPEC countries had to be recycled. Financial markets everywhere serve to facilitate transfer of resources from surplus units (savers) to deficit units (borrowers). i. national markets were largely independent of each other and financial intermediaries in each country operated principally in that country. fed back into the economies of oil importing nations. significant deregulation of the financial markets has already been effected or is under way. For instance. Functional and geographic restrictions on financial institutions. during the late seventies. In virtually all major industrial economies. DESCRIPTIVE 1. reflected in their current account balances. Higher yields have to be offered and the secondary market is very limited. the large current account deficits of the US had to be financed primarily from the mounting surpluses in Japan and Germany. During the eighties. Global financial markets are a relatively recent phenomenon. Trace the development of the International Capital Markets The financial revolution has been characterized by both a tremendous quantitative expansion and an extraordinary qualitative transformation in the institutions. Growing (and continually shifting) imbalance between savings and investment within individual countries. restrictions on the kind of securities . The other motive force is the increasing preference on the part of investors for international diversification of their asset portfolios. Investigators have established that significant risk reduction is possible via global diversification of portfolios. developing countries as a group have experienced huge current account deficits and have also had to resort to international financial markets to bridge the gap between incomes and expenditures. Healthy financial markets also offer the savers a range of instruments enabling them to diversify their portfolios. Prior to 1980.Yankee bonds can be offered under rule 144a of Sec. instruments and regulatory structures. Globalization of financial markets during the eighties has been driven by two underlying forces. An efficient financial market thus achieves an optimal allocation of surplus funds between alternative uses. These issues are exempt from elaborate registration and disclosure requirements but rating. has necessitated massive cross-border financial flows.e. During the nineties. while not mandatory is helpful. The foreign exchange market and the Eurocurrency and Eurobond markets based in London were the only markets that were truly global in their operations. as the volume of concessional aid from official bilateral and multilateral sources has fallen far short of their perceived needs. These demand-side forces accompanied by liberalization and geographical integration of financial markets has led to enormous growth in cross-border financial transactions.

All the major industrial countries have important domestic financial markets as well but only some such as Germany and France are also important international financial centers. E. Restrictive measures taken by the administration. The significant ones are: Transfer of assets of erstwhile Soviet Union to Europe. The result of these processes has been the emergence of a vast. Euro bonds. interest rate ceilings. However. medium. at the end of the 1960s. the former Soviet Union and Soviet-bloc countries sold gold and commodities to raise hard currency. Notable developments in international capital markets can be traced to the end of 1950s. Finally. International capital markets subsequently came to be known as Euro markets. the . these Communist countries were afraid of depositing their US dollars in US banks for fear that the deposits could be frozen or taken. are the markets on which Euro currencies.Korea. also called Euro markets.or long-term securities or credits has become necessary for the international economy. provided that local regulations permit the market and potential users are attracted to it.they can issue and hold in their portfolios. Instead they deposited their dollars in a French Bank whose telex address was Euro-Bank. despite these reservations. But control and government intervention have not entirely disappeared. responding rapidly to changing investor preferences and increasingly complex needs of the borrowers by designing new instruments and highly flexible risk management products. etc- permit only limited access to foreign investors. they are important world financial centers such as Switzerland. Because of anti-Soviet sentiment. There are several reasons for their growth. volumes dealt have increased and the process is continuing to grow. Besides. Tokyo and New York. Luxembourg. the markets themselves have proved to be highly innovative. seamless global financial market transcending national boundaries. In the 1950s and early 1960s. The most important international financial centers are London. International financial markets can develop anywhere. International Capital Markets. Euro equity and Euro bills are exchanged.g. The important ones are as follows: Regulation 'Q'. dollar deposits outside the US have been called Eurodollars and banks accepting Eurocurrency deposits have been called Euro banks. On the other hand. In 1960. Several regulatory measures (initiated particularly in the USA) also contributed (in an indirect manner) to the development of International capital markets. International financing in the form of short-. Regulation 'Q' in the USA fixed a ceiling on interest rates offered by American banks on term deposits and prohibited them to remunerate the deposits whose term was less than 30 days. even though some countries have relatively unimportant domestic financial markets. the dominant trend is towards globalization of financial markets. Taiwan. Since that time. Singapore and Hong Kong. barriers to foreign entities accessing national markets as borrowers and lenders and to foreign financial intermediaries offering various types of financial services have been already dismantled or are being gradually eased away. Financing techniques have diversified. South East Asia.

the tax was withdrawn in 1974. India’s borrowings have mainly been by way of syndicated bank loans. The financing system practiced hitherto also was not able to respond to capital needs of the international economy. all India financial institutions and large public and private sector companies to access the market. buyers’ credits and lines of credits. the expected rate from borrowers. For instance. Indian entities began accessing external capital markets towards the end of the seventies as gradually the amount of concessional assistance became inadequate to meet the increasing needs of the economy. Japanese. . They could do so by operating on Euro dollar markets. to attract investors. The objective was to reduce the deficit of BOP of the USA and to establish equilibrium in international structure of interest rates. Prior to that only apex financial institutions and the public sector giant ONGC had tapped the German. there was a steady improvement in the market’s perception of the creditworthiness of Indian borrowers (manifested in the steady decline in the spreads they had to pay over LIBOR in the case of Euro loans). which were not subject to interest-rate and other regulations. banks were directed not to lend or invest in foreign operations beyond the limits of the previous year(s). attracted by the interest rate on Euro market. • The flight of American Capital. Throughout the eighties. European banks availed of this opportunity. This contributed to the growth of Euro dollar market. tax was imposed on the purchase of foreign securities (portfolio investments) by American residents. banks were neither constrained to respect a certain compulsory reserve ratio on their deposits in Euro dollars nor constrained to maintain their interest rates below a certain ceiling. some companies launched the issue of dollar bonds outside the USA. subsequently. Globalization of big multinationals has further boosted this development. After liberalization. The interest rate paid by American banks was low. Program of voluntary restrictions on investments. In 1963. but even the authorities adopted a selective approach and permitted only a few select banks. vis-à-vis. This in turn led them to take recourse to the Euro dollar market. Tax of interest equalization. American banks borrowed on the Euro dollar market. and Euro dollar bond markets. Other instruments such as foreign and Euro bonds have been employed less frequently though a number of companies made issues of Euro convertible bonds after 1993. The pace accelerated around mid-eighties. Swiss. which resulted in: • The increase of indebtedness of these banks on the Euro dollar market. Realizing its adverse effects. There may be other reasons as well for development of Euro dollars. In fact. they offered higher rates of interest at the cost of contenting themselves with smaller margins than those offered by American banks. The USA initiated/imposed various restrictions on its financial system to tackle BOP problems. For instance. during 1993-94 there was a sharp increase in the amount of funds raised by corporate entities form the global debt and equity markets. As a result. in order to avoid tax payment.Federal Reserve reduced the growth of total monetary mass. The initial forays were low-key. the business community felt a scarcity of funds. The money market rate went up. Differential of American lending and borrowing rates.

that is. if they are unable to place the bonds with investors. The total elapsed time from the decision date of the borrower to issue Eurobonds until net proceeds from the sale are received is typically 5 to 6 weeks. Most of the underwriters along with other banks will be a part of the placement or selling group that sells the bonds to the investing public.The 1990-91 crisis sent India’s sovereign rating below investment grade and the foreign debt markets virtually dried up to be opened up again after 1993. The discount or the underwriting spread is typically in the 2 or 2. the spread depending upon the borrowers ratings and market conditions. Describe the mechanism of the Euro Bond Market. An example is a Dutch borrower issuing DM-denominated bonds to investors in the UK. . an Italian borrower. Switzerland and the Netherlands. Eurobond markets in all currencies except the Japanese Yen are quite free from any regulation by the respective governments. The Eurobond market is the largest international bond market. 2. The lead manager will usually invite co managers to form a managing group to help negotiate terms with the borrower.5% range. Thus a Eurodollar bond will be priced to a yield a YTM (Yield-to-Maturity) somewhat above the US treasury bonds of similar maturity. The underwriting syndicate is a group of investment banks. The managing group along with other banks. they will commit their own capital to buy the issue from the borrower at a discount from the issue price. typically treasury issues. Euro Bond: issue is one denominated in a particular currency but sold to investors in national capital markets other than the country that issued the denominating currency. will serve as underwriters for the issue. The market has since grown enormously in size and was worth about $ 428 billion in 1994. and the merchant banking arms of commercial banks that specialize in some phase of public issuance. ascertain market conditions and manage the issuance. merchant banks. Primary market: A borrower desiring to raise funds by issuing Euro bonds to the investing public will contact an investment banker and ask it to serve as lead manager of an underwriting syndicate that will bring the bonds to market. Straight bonds are priced with reference to a benchmark. Floatation costs of the Eurobond are comparatively higher than costs indicated with syndicated Eurocredits. which is said to have originated in 1963 with an issue of Eurodollar bonds by Autostrade.

you know exactly how much you're going to get back (in most cases. When the decade was up. The secondary market is an over the counter market with principal trading in London.at a predetermined rate of interest -. This tombstone indicates the lead manager. this regular income is what makes them inherently less volatile than stocks. The bonds are quoted in percentage of their value. A key difference between stocks and bonds is that stocks make no promises about dividends or returns. Clauses of reimbursement before maturity are provided for. That's why bonds are also known as "fixed-income" investments -. you'd get back your $1. The secondary market comprises of market makers and brokers. And while GE stock spends most of its time moving upward. . or to build roads and finance factories -.even years -.the "coupon. When a bond is issued. the company guarantees to pay back your principal (the face value) plus interest. Extra Information What is a bond? A bond is a loan and you are the lender. General Electric's dividend may be as regular as a heartbeat.000 face value. After. They do not deal directly with retail clients. The bid-ask is their only profit. However. but the company is under no obligation to pay it. Market makers stand ready to buy or sell for their own account by quoting a two way bid and ask prices. the price you pay is known as its "face value.going the other way.they assure you a steady payout or yearly income. You would collect interest payments totaling $50 in each of those 10 years. they may also trade for their own account. or with retail customers. All of these entities need money to operate -. co-lead managers and members of the guarantee syndicate.to fund the federal deficit. it has been known to spend months -. you buy a bond with a $1." Once you buy it. The borrower is usually the government. for instance.so they borrow capital from the public by issuing bonds. a 5% coupon and a 10-year maturity. Brokers charge a small commission to the market makers that engaged them. If you buy the bond and hold it to maturity. Subsequently. a local municipality or a big company like General Motors. And although they can carry plenty of risk." Say. for instance. through a broker. a state. the issue price is fixed. Secondary Market: Eurobonds purchased in the primary market can be resold before their maturities in the secondary market.The lead manager prepares a preliminary prospectus focusing on economic and financial characteristics of the project and financial standing of the borrower. Market traders trade directly with one another. however. After having consulted a certain number of banks. important trading is also done in other major European cities. without taking into account the coupon already running.the "maturity date" -. the lead manager decides on the interest rate. Brokers accept buy or sell orders from market makers and then attempt to find a matching party for the other side of the trade. When GE issues a bond. the issue advertising is done in International Press in the form of tombstone. the issuer promises to pay you back on a particular day -. anyway).000 and walk away.

public enterprises." issued by the World Bank. There are several types of bonds such as floating rate bonds. deep discount bonds. is the market that deals in medium term Euro credit or Euro loans. Also referred to as the "national bond market. international organisations and private financial institutions. Internal Bond Market: The internal bond market refers to all bond trading activity in a given country and is comprised of both a domestic bond market and a foreign bond market. . The external bond market combined with the internal bond market comprises the global bond market. Examples of an external bond are the "global bond. (For more information. What are the different international financial markets? The international financial markets consist of the credit market. bond market and equity market. priced with reference to the UK gilts. Foreign bonds and Eurobonds comprise the international bond market." The internal and external bond markets comprise the global bond market Bulldog Bonds: A sterling denominated foreign bond. The salient features of these bonds are that they permit to raise very high amounts. The Eurobond market is a major external bond market. The international credit market. This comprises both. with uniform price all over the world. are issued outside any country's jurisdiction. Rembrandt Bond: Denominated in the Dutch guilder. External Bond Market: The external bond market refers to bond trading activity wherein the bonds are underwritten by an international syndicate. International banks and their clients comprise the Eurocurrency market and form the core of the international money market. the primary sale of new common stock by corporations to initial investors and how previously issued common stock is traded between investors in the secondary markets. money market. and Eurodollar bonds. They offer very high liquidity since they are quoted on several exchanges while secondary market functions round the clock. The international equity market tells us how ownership in publicly owned corporations is traded throughout the world. please refer to page 504-505 in P G Apte) 3. zero coupon bonds.Global Bond: They have a minimum value of $1 billion and are effected simultaneously in Europe. etc. There are several other money market instruments such as the Euro Commercial Paper (ECP) and the Euro Certificate of Deposit (ECD). America and Asia. and are not registered. They are especially used by governments. are offered in several countries simultaneously. also called Euro credit market.

. forced commercial banks to realize that their traditional business of accepting deposits and making loans was not enough to guarantee their long-term survival and growth. Alongside liberalization. is something new. The degree of mobility of capital. This refers to the Euro currencies Market where borrower (investor) from country A could raise (place) funds from (with) financial institutions located in country B. They began looking for new products and markets. the overall trend was in the direction of relaxation of controls. . a truly international financial market had already been born in the mid-fifties and gradually grown in size and scope during sixties and seventies. which till then had compartmentalized the global financial markets. the international financial environment was becoming more volatile. investment banks. Highly rated issuers began approaching investors directly rather than going through the bank loan route. Removal of restrictions has resulted into geographical integration of the major financial markets in the OECD countries. Another noticeable trend is functional integration. These forces gave rise to innovative forms of funding instruments and tremendous advances in risk management.can be used in any) The last two decades have witnessed the emergence of a vast financial market across national boundaries enabling massive cross-border capital flows from those who have surplus funds and a search of high returns to those seeking low-cost funding. It is no more a "euro" market but a part of the general category called “offshore markets”. the global dispersal of the finance industry and the enormous diversity of markets and instruments. geographical scope and diversity of funding instruments.there were fluctuations in interest and exchange rates. which had begun emerging in the seventies. While the process was far from smooth. finance companies. etc. While opening up of the domestic markets began only around the end of seventies. denominated in the currency of country C. adoption of capital adequacy norms and intense competition. The early part of eighties saw the process of disintermediation get underway.International Financial Market. which a firm seeking funds can tap. borrowers and financial institutions. this market grew further in size.(general. During the eighties and nineties. The decade saw increasing activity in and sophistication of the derivatives’ market. non- residents were allowed freer access to national capital markets and foreign banks and financial institutions were permitted to establish their presence in the various national markets. Concurrently.are giving way to diversified entities that offer the full range of financial services. On the other side. Gradually this trend is spreading to developing countries many of which have opened up their markets-at least partially-to non-resident investors. other qualitative changes have been taking place in the global financial markets. The traditional distinctions between different financial institutions-commercial banks. debt crisis in the developing countries. Exchange and capital controls were gradually removed. Major OECD (Organization for Economic Co-operation and Development) countries had began deregulating and liberalizing their financial markets towards the end of seventies.

currency of denomination.Taken together. floating rate notes and euro medium-term notes (EMTNs). The difference between Euro markets and their domestic counterparts is one of regulation. It is the largest offshore market. these companies preferred to keep their surplus dollars in European banks. Domestic banks in US (as in many other countries) were subjected to reserve requirements. This refers to the well-known ‘Eurocurrencies Market’. mainly from the US. During the 1950s. certificates of deposit (CDs). List out the growth and functions of Eurocurrency markets While opening up of the domestic markets began only around the end of seventies. Emergence of Euro markets: 1. a truly international financial market had already been born in the mid-fifties and gradually grown in size and scope during sixties and seventies. Eurocurrencies market was the only truly international financial market of any significance. euro commercial paper (ECP).term floating rate loans. interest rate basis. 3. exchange rates.g. these markets have evolved a variety of instruments other than time deposits and short-term loans. maturity. The prefix "Euro" is now outdated since such deposits and loans are regularly traded outside Europe. The same flexibility is available to investors to structure their portfolios in line with their risk-return tradeoffs and expectations regarding interest rates. The importance of the dollar as a vehicle currency in international trade and finance increased. eurobonds. incorporating special features and so forth. the erstwhile USSR was earning dollars from the sale of gold and other commodities and wanted to use them to buy grain and other products from the West. . e. 2. What matters is the location of the bank neither the ownership of the bank nor ownership of the deposit. However. Due to distance and time zone problems as well as their greater familiarity with European banks. these developments have given rise to a globally integrated financial marketplace in which entities in need of short. They approached banks in Britain and France who accepted these dollar deposits and invested them partly in US. 4. It is mainly an inter-bank market trading in time deposits and various debt instruments. Eurobonds are free from rating and a disclosure requirement applicable to many domestic issues as well as registration with securities exchange authorities. Over the years. a choice made more attractive by the higher rates offered by Euro banks.to long.or long-term funding have a much wider choice than before in terms of market segment. which meant that a part of their deposits were locked up in relatively low yielding assets. medium. so many European corporations had cash flows in dollars and hence temporary dollar surpluses. Prior to 1980. stock markets and commodity prices. they did not want to keep these dollars on deposit with banks in New York. as they were apprehensive that the US government might freeze the deposits if the cold war intensified.

Also the amount of equity that they bring has a marked bearing on the extent of debt that can be raised for the project. they are keenly interested in the successful completion of the project and shoulder major responsibilities as regards its execution. Project Operators An operating company intervenes in the erection of the project. Some projects will have expenses and revenues that involve several currencies. Financial risk In general. Being so. public financing organisations. The fact that they bring in the equity capital is an indication of their interest. Added to this are the considerations mentioned above. 2. national or international financial institutions. others 1. Participants in International Project Financing – a) Sponsors b) Lenders Sponsors These are partners in the project who bring in the equity capital or risk capital. Guarantors Guarantees maybe provided by banks. The major factors affecting financial risk are degree of indebtedness. Financing of a big project necessitates intervention of a banking pool consortium composed of banks. private insurance companies etc. Sometimes people who bring in the equity capital are just the initiators of the project. SHORT NOTES 1. development banks etc. international organisations. political. As a result the exchange rate risk is very high. viz. international financial institutions. It brings its organisational know-how to manage the project. export financing institutions etc. the public or private investors.financial. Risks associated with international projects. the ability of Euro banks to offer better rates both to the depositors and the borrowers and convenience of dealing with a bank that is closer to home. Lenders They bring in the debt capital. Included in this category are multinational firms. . the terms and conditions of repayment of debt and currency used.The main factors behind the emergence and strong growth of the Eurodollar markets were the regulations on borrowers and lenders imposed by the US authorities which motivated both banks and borrowers to evolve Eurodollar deposits and loans. future buyers of products or services of the project. who is familiar with business culture and practices in Europe. international projects are prone to greater financial risk as a bulk of finance is in the form of debt.

Each country in the world presents a different political profile and represents a unique source of political risk that firms must assess and manage when they make foreign investments. confiscation.) 3. Foreign Exchange Risk As corporations expand their international activities. riots. (E. What constitutes political risk and how to measure it? The political risk management typically involves: . the values of these foreign assets and liabilities change accordingly.Identifying political risk and its likely consequences . a pure domestic firm is affected only by domestic economic conditions - the domestic economic risk. terrorism. 5. shifts in consumer preferences. but are not limited to. etc. discriminative or arbitrary regulations on business practices (hiring. local investors or the local government may be associated with the project. sales and income from foreign sources. For a corporation.Devising measures to maximize compensation in the event of expropriation Country Risk: It refers to elements of risk inherent in doing business in the economic. in today's integrated world economy.: local restaurant/dept store. Many firms that appear strictly pure domestic confront foreign economic risk indirectly. In order to minimize this risk. In view of the volatility observed on the rates like LIBOR.g. Therefore it is necessary to plan the coverage of all these risks.Developing policies in advance to cope with the possibility of political risk . contract negotiation). etc. As exchange rates change. Economic Risk Economic risk is risk created by changes in the economy. However. foreign exchange loss. it is related to technological changes. social. the change in the corporation value is related to the net change in the values of the foreign assets and foreign liabilities.Projects maybe financed with floating rates. price controls. Counter party Risk . they begin to acquire foreign assets and foreign liabilities. . civil wars.Strengthening a firm's bargaining position . Political Risk Political risk is risk created by political changes or instability in a country.The risk that a counter party will default on a financial obligation. Typically. 2. Insurance against political risk is another useful technique recommended for the purpose. and political environment of another country. administrative hurdles. exchange rate risk is the sensitivity of the value of the corporation when the exchange rates change. Ideally.g. the concept of a pure domestic firm has less practical relevance. Obviously. the actions of competitors. nationalization. foreign direct investment. real estate agent) 4. uncertain property rights. the interest rate risk is also significant. (E. foreign exchange and capital controls. These factors include.

7. This method of financing was used in petroleum and gas industry in the USA and Canada. The problem sometimes encountered in this method is to decide the proportion in which the risk is to be shared between two parties.Other risks relate to the risk of cost overruns and bad management. created with a view to setting up of a big project. this method of project financing is generally not preferred. it is true generally that a given entity has an access to both the segments of the markets for placing as well as raising funds. . Domestic v/s Offshore markets Financial assets and liabilities denominated in a particular currency .are traded are primarily in the national financial markets of that country. There are theories by experts that suggest that there are no two types of financial markets (viz. legally independent.The risk of being closed out from a financial market and unable to renew (or roll over) a short-term contract. Financing with total risk borne by lenders where only the future cashflows ensure the reimbursement of the loan. In case of many convertible currencies they are traded in the financial markets outside the country of that currency.6. Liquidity Risk -The risk that a financial position cannot be sold quickly at prevailing prices.say the Swiss Franc . 9. Other risks . These financial markets are known as ‘Offshore Markets’. Financing of MNCs in local or international market Project financing may be defined as financing of an economic unit. 2. While it is true that neither both markets will offer both the financing options nor any entity can access all segments of a particular market. 8. Due to increased level of risks. 3. Project is considered as a distinct legal entity and is financed. Rollover Risk . Domestic and offshore markets) but everything is a part of single ‘Global Financial Market’. Delivery Risk . In another type of financing. There are two major methods of financing international projects: 1. both the lender and the promoter share the risk. These financial markets are known as ‘Domestic Markets’. Therefore the risk to be borne is substantial.The risk that a buyer will not deliver payment of funds after a seller has delivered securities or foreign exchange that were purchased. to a marked extent. by debt (65 to 75 percent). which is commercially profitable and financially viable.

eurobonds. The offshore markets on the other hand have minimal regulation and often no registration. Major segments of the domestic markets are subject to strict supervision by the relevant authorities such as SEC in US. The main factors behind the emergence and strong growth of the Eurodollar markets were the regulations on borrowers and lenders imposed by the US authorities which motivated both banks and borrowers to evolve Eurodollar deposits and loans. Bank loans etc.to long. What matters is the location of the bank neither the ownership of the bank nor ownership of the deposit.Similarity Experts suggest that ‘arbitrage’ will ensure that both these markets will be closely linked together in terms of costs of funding and returns on assets. these markets have evolved a variety of instruments other than time deposits and short-term loans. in domestic markets where regulation tends to be the least. viz. Finally it must be noted that though the nature of regulation continues to distinguish Domestic from the offshore markets. certificates of deposit (CDs). It is mainly an inter-bank market trading in time deposits and various debt instruments. Added to this are the considerations mentioned above. Ministry of Finance in Japan and the Swiss National Bank in Switzerland. 4.term floating rate loans. who is familiar with business culture and practices in Europe. Eurocurrency Markets While opening up of the domestic markets began only around the end of seventies. External Bond Market . These authorities regulate foreign (non-resident) entities’ access to the public capital markets in their countries by laying down eligibility criteria. Unlisted Bonds. 5. Eurocurrencies market was the only truly international financial market of any significance. e. The prefix "Euro" is now outdated since such deposits and loans are regularly traded outside Europe. a truly international financial market had already been born in the mid-fifties and gradually grown in size and scope during sixties and seventies. disclosure & accounting norms and registration & rating requirements (similarly for domestic banks. This refers to the well-known ‘Eurocurrencies Market’. Differences Both of these markets significantly differ on the ‘Regulatory dimension’. there are segments like Private Placements. It is the largest offshore market. Over the years. floating rate notes and euro medium-term notes (EMTNs).g. medium. the ability of euro banks to offer better rates both to the depositors and the borrowers and convenience of dealing with a bank that is closer to home. euro commercial paper (ECP). reserve requirements and deposit insurance). Prior to 1980.

and are not registered. investors. Switzerland and the Netherlands.The external bond market refers to bond trading activity wherein the bonds are underwritten by an international syndicate." issued by the World Bank. An example is German MNC issuing dollar denominated bonds to the U.S. Examples of an external bond are the "global bond. and Eurodollar bonds. are issued outside any country's jurisdiction. The External Bond Market comprises of the :  Foreign Bond Market and  Euro Bond Market Foreign Bond: issue is one offered by a foreign borrower to the investors in a national capital market and denominated in that nations currency. The external bond market combined with the internal bond market comprises the global bond market. An example is a Dutch borrower issuing DM-denominated bonds to investors in the UK. The Eurobond market is a major external bond market. Euro Bond: issue is one denominated in a particular currency but sold to investors in national capital markets other than the country that issued the denominating currency. are offered in several countries simultaneously. .