EURO CURRENCY MARKET

INSTRUMENTS.
Commercial Paper
An unsecured, short-term loan issued by a
bank or corporation in the international
money market, denominated in a currency
that differs from the corporation's domestic
currency.
It is a promissory note with maturity less than
a year, generally the period varies between 90
days to 180 days.
• Generally issue is not underwritten.
• Amount: USD 100,000 or equivalent.
• Issued on Discount to Yield basis, but interest
rate works out lesser than that is paid on bank
borrowing and higher than that is paid by the
bank on deposits.
• They are unsecured instrument
For example, if a U.S. corporation issues a short-
term bond denominated in Canadian dollars to
finance its inventory through the international
money market, it has issued euro commercial paper.
Whatever the instrument used, the issuer’s aims
are similar:
• to widen the investor base beyond its
domestic market,
• and/or to avoid the regulatory restrictions of
its domestic market.
Certificate of Deposit

• A certificate of deposit (CD) is a money market

instrument issued by a depository institution
as evidence of a time deposit. Small
denomination certificates of deposit are
issued to retail investors.
• Euro CDs are issued outside a country but are
denominated in that country's currency.
• For example, euro CDs can be used to fund
international lending or to tap a wider
investor pool on behalf of a Eurobank’s
domestic lending operations. As well as
widening the deposit market internationally,
Euro CDs allow banks to substitute from
domestic CDs when borrowing costs are lower
in the Euro market and vice-versa.
• Arbitrage opportunities may also arise between
the domestic and Euro interbank and CD markets,
which helps to create liquidity in the secondary
market.
• In addition to euro money market securities - as
in the bond market (foreign bonds) - banks (CDs) and
corporates (CP) can issue money market securities in a foreign
country denominated in that country’s currency.
For example, a non-US bank issuing Dollar denominated CDs in
the US is issuing a Yankee CD
 1. EURO-NOTE MARKET
Market of short- to medium—term debt
instruments sourced in the Eurocurrency markets
• I. Euro-note facilities: short-term, negotiable promissory
notes, provided by international investment and
commercial banks (fees for underwriting and placement
services).
• The euro-note is substantially cheaper source of ST
fund’s than syndicated loans, because the notes are
placed directly with the investor public, and the
securitized form allows the ready establishment of liquid
secondary markets.
• II- Note-issuance facility (NIF):
A medium-term legally-binding commitment under
which a borrower can issue a short-term paper in its
own name, underwritten by banks which are
committed either to purchase any note the borrower
is unable to sell, or to provide credit.
• Issuing procedures with arranger or placing
agent and tender panel.
• Borrowers place short term notes of 3 months
to 6 months maturity directly with the investors
and the notes are rolled over on maturity
• The banks underwrite at the time of issue as
well as when the notes are rolled over with
slight variation they are also known as:
1. Revolving underwriting facility (RUF)
2. Standby Note Issuance Facility (SNIF)
III- Euro medium-term notes (EMTNs)

• It bridges the gap between the ST euro

commercial paper issued in domestic markets
< 6 months, and the longer-term international
bond.
Market expansion when the SEC instituted Rule # 415, allowing
companies to obtain shelf registrations for debt issues: once the
registration was obtained, the corporation could issue notes on a
continuous basis without having to obtain new registrations for
each additional issue. This allows a firm to sell S/MT notes through
a cheaper and more flexible issuance facility than ordinary bonds.
Maturity: from 1 year to < 10 years Small denominations (from $2
to $5 million)
• 1. EMTN represents Long Term, Non
Underwritten and fixed interest rate source
of raising finance.
• 2. It can be comparable with Euro-bonds with a
difference that Eurobonds issue is underwritten,
where as MYN issue is not underwritten
• 3. Their maturity is somewhere between short
term CPs(less than one year) and long term Euro
bonds(more than five years)
• 4. They are privately placed and have great
flexibility
2: THE EURO-BOND MARKET
A Eurobond is underwritten by an international
syndicate of investment banks and other securities
firms and is sold exclusively in countries other than
the country in whose currency the issue is
denominated: $-denominated bond issued by a US
company, but sold to investors in Europe and Japan.
Eurobonds offer tax anonymity and flexibility.

• To receive interest, the bearer cuts an interest

coupon from the bond and turns it in at a banking
institution listed on the issue as paying agent.
Eurobonds are offered simultaneously in a
number of different capital markets.
1. Straight fixed- rate issue: bearer bonds, fixed
coupon, set maturity date, full principal
repayment upon final maturity. Coupons are
normally paid annually.
2. Equity- linked bonds:
• Convertible bonds or bonds with equity
warrants (amounted to $64 billion in 1997,
and $32 billion in 1988)
• Right to acquire equity stock in the issuing
company (sometimes with detachable
warrants containing the acquisition rights).
• The market value of an ELB is composed of the
naked value and the conversion value.
• The conversion to stock prior to maturity is at
a specified price per share, or a specified
number of shares per bond.
• The borrower is able to issue debt with lower
coupon payments due to the added value of
the equity conversion feature.
3- FRNs:
Since the early 1980s. Medium-term notes where
the interest is fixed as a percentage above six-
month LIBOR. Pays a semi-annual coupon
determined on variable-rate base.
• Negotiable and transferable securities with
flexible interest rate, fixed interest periods, and
issued in pre-determined and uniform amounts.
• FRN’s are directed at institutional investors.
• FRN is similar to straight bonds with respect to
maturity and denomination
• Rate of interest however varies and is based on LIBOR +
1/8%, ¼%,1.5%........
• Rate of interest is adjusted every six months
• Minimum interest rate clause may be included
• ‘drop lock’ clause may also be included, which means if
minimum interest rate happens to be paid then it is
locked for the remaining period of the bond.
• Generally it is found that banks issue and invest in FRNs
ADR
• An American Depositary Receipt (ADR) is how
the stock of most foreign companies trades in
United States stock markets. Each ADR is
issued by a U.S. depositary bank and
represents one or more shares of a foreign
stock or a fraction of a share.
• if investors own an ADR they have the right to
obtain the foreign stock it represents, but U.S.
investors usually find it more convenient to
own the ADR.
• . The largest depositary bank is The Bank of
New York.
• ADRs do not eliminate the currency and
economic risks for the underlying shares in
another country
For example, dividend payments in euros would be
converted to U.S. dollars, net of conversion expenses
and foreign taxes and in accordance with the deposit
agreement.
GDR
• A Global Depository Receipt or global depositary
receipt (GDR) is a certificate issued by a
depository bank, which purchases shares of
foreign companies and deposits it on the
account.
• GDRs represent ownership of an underlying
number of shares
• Global depository receipts facilitate trade of
shares, and are commonly used to invest in
companies from developing or emerging markets
Prices of global depositary receipt are often close to
values of related shares, but they are traded and
settled independently of the underlying share.

• 1. A bank certificate issued in more than one

country for shares in a foreign company. The shares
are held by a foreign branch of an international
bank. The shares trade as domestic shares, but are
offered for sale globally through the various bank
branches.

2. A financial instrument used by private markets to

raise capital denominated in either U.S. dollars or
Euros.
INTERNATIONAL
•
BOND
• An international bond is a type of long-term debt
security. An international bond essentially works
like a loan, with the investor being the lender and
the issuing entity being the borrower.
• International bonds can provide bondholders
with the ability to earn fixed interest payments
for a set period of time.
• The investor then earns interest payments at
periodic intervals until the bond reaches its
maturity date.
• Once the bond matures, the initial principal is
paid back to the investor in full.
• A Eurobond is a type of international bond
that is issued using currency that differs from
the domestic market country’s currency.
• Eurobonds are named according to the
currency in which they are denominated in.
• For example, a Euroyen bond is denominated
in Japanese yen.
MONEY MARKET INSTRUMENTS OF INDIA:

• Call/ Notice/ Term Money

• Repo/ Reverse Repo
• Inter Corporate Deposits
• Commercial Paper
• Certificate of Deposit
• T-bills
• Inter Bank Participation Certificate
 Certificate Of Deposit (June,1989)
• Short term borrowings in the form of Usance
Promissory Notes having a maturity of not less
than 15 days upto a maximum of 1 year.

• Subject to payment of Stamp Duty under

Indian Stamp Act, 1899 (Central Act)

• They are like bank term deposit accounts,

freely negotiable instruments often referred to
as Negotiable CD.
 Features Of CD

• Can be issued by all scheduled commercial banks

except RRB’s
• Minimum period 15 days, Maximum period 1 year
• NRIs can subscribe to CDs on non-repatriable basis.
• Minimum amount Rs.1 lac & in multiples of Rs.1 lac
• Transferable by endorsement & delivery.
• CRR & SLR are to be maintained.
• CDs are to be stamped.
 Advantages

• Enable high return on short term surpluses.

• Enhances liquidity & allows resale.
• For raising resources in times of need.
• To improve lending capacity of the bank.
 Commercial Paper

• CP is an unsecured money market

instrument (short-term) issued in the form
of a promissory note.

• Who Can Issue CP?

• Highly rated corporate borrowers,
primary dealers (PDs) & satellite dealers
(SDs) & all-India financial institutions (FIs)
 Features
• Cheaper source of funds than limits set by banks.
• Optimal combination of liquidity return.
• Highly liquid instrument.
• Transferable by endorsement & delivery.
• Backed by liquidity & earnings of issuer.
• Issued for a minimum period of 30 days and a
maximum up to one year
• Issued at a discount to face value
• Issued in demat form. (Compulsory demat from July
'01).
 Types of CP
• Direct Papers :-
Issued directly by company to investors without
any intermediary.

• Dealer Papers :-
Issued by a dealer or merchant banker on behalf
of a client.
 Eligibility for issue of CP
• The tangible net worth-not less than Rs.4
crore;

• the working capital (fund-based) limit-not less

than Rs.4 crore

• & borrowal account- classified as a Standard

Asset by the financing banks.
 Meaning of Euro-Deposit

The equivalent of a money market rate on cash deposits made in the euro
currency. Euro deposit rates will usually be quoted as "money market euro
deposit rates" and are typically only offered to U.S. investors with minimum
investments of greater than 10,000 euros.
Euro deposits pay a floating interest rate (like a money market account) and
offer the chance for capital appreciation if the euro appreciates against the
investor's home currency (presumably the dollar). Euro deposit rates are based
on the euro interbank offer rate, which is set by the European Central Bank.
 Types of Euro-Deposit
There are two distinct types of euro deposit. The older of the two refers to a
deposit of foreign currency into a bank account outside the currency's home
country; the deposit of U.S. dollars into a bank account in London is one
example. Since the 1999 introduction of the euro-currency, a euro deposit
may also refer to a deposit of euros into a bank, typically in a European
Monetary System (EMS) member country, but not necessarily so; a growing
number of banks around the world offer deposit accounts in a range of
currencies, the euro prominent among them. Both types are usually made for
fixed terms, though this can range from one day — typically made only by
corporations, large investment firms, and other banks — to one year or
more. Interest rates on both types of euro deposits may be fixed for the term
of the deposit, or floating, meaning the rate will be reset periodically over the
deposit's term.
 Meaning of “Repos”
‘Repo’ is the generic term for repurchase agreements (also known as ‘classic
repos’) and buy/sell-backs. These are financial instruments typically used by
securities dealers and other leveraged traders to fund the purchase and
holding of securities and other assets. Repo is therefore part of the wider
market in securities financing (along with securities lending and borrowing).
 How do Repos Work?
A typical repo trade starts with a dealer buying an asset (eg. a bond) in an
outright purchase from the so-called ‘cash’ market. The dealer then has to
borrow money to pay for this purchase, which he does by going into the repo
market and selling the very asset that he has just bought outright. The
proceeds from the repo sale are used to pay for the asset. However, as part of
the repo transaction, the dealer not only sells the asset but simultaneously
commits to buy it back from the repo counterparty at an agreed price at a
future date. This is what differentiates a repo from normal (cash) trading (ie
buying and selling outright). The fixed repurchase price means that, although
the asset has been sold, a fall (rise) in value during the term of repo will be a
loss (profit) to the seller, as he will have to buy it back at the price fixed at the
start of the repo.
In the international market, this is regulated by the ICMA Global Master
Repurchase Agreement (GMRA).