CHAPTER9

CHAPTER9CHAPTER9

INTERNATIONAL INTERNATIONAL FINANCING AND FINANCING AND INTERNATIONAL INTERNATIONAL

FINANCIAL MARKETSFINANCIAL MARKETS

INTERNATIONAL FINANCING AND INTERNATIONAL FINANCING AND INTERNATIONAL FINANCIAL MARKETSINTERNATIONAL FINANCIAL MARKETS

CHAPTER OVERVIEW:CHAPTER OVERVIEW:I.I. CORPORATE SOURCES AND USES CORPORATE SOURCES AND USES OF OF FUNDSFUNDSII.II. NATIONAL CAPITAL MARKETS AS NATIONAL CAPITAL MARKETS AS INTERNATIONAL FINANCIAL INTERNATIONAL FINANCIAL CENTERSCENTERSIII.III. THE EUROMARKETSTHE EUROMARKETSIV.IV. INTEREST RATE AND CURRENCY INTEREST RATE AND CURRENCY SWAPSSWAPSV.V. DEVELOPMENT BANKSDEVELOPMENT BANKS

I.I. CORPORATE SOURCES CORPORATE SOURCES AND USES OF FUNDSAND USES OF FUNDSI.I. CORPORATE SOURCES AND USES OF CORPORATE SOURCES AND USES OF

FUNDSFUNDSA.A. 3 General Sources of Funds:3 General Sources of Funds:

1.1. Internally-generated cashInternally-generated cash2.2. Short-term external fundsShort-term external funds3.3. Long-term external fundsLong-term external funds

CORPORATE SOURCES AND CORPORATE SOURCES AND USES OF FUNDSUSES OF FUNDS

B.B. Forms of SecuritiesForms of Securities1.1. EquityEquity2.2. Debt: the most preferred formDebt: the most preferred form


C.C. Debt Instruments UsedDebt Instruments Used1.1. Commercial Bank LoansCommercial Bank Loans2.2. BondsBonds

a.a. Publicly issuedPublicly issuedb.b. Privately issuedPrivately issued


D.D. Financial Markets v. Financial Financial Markets v. Financial IntermediariesIntermediaries

1.1. SecuritizationSecuritizationa. Definition:a. Definition:

replacing bank loans withreplacing bank loans withsecurities issued in public securities issued in public markets.markets.


b.b. Reflects reduction in access Reflects reduction in access costscosts

due todue to1.)1.) Technological Technological

improvementsimprovements2.)2.) GlobalizationGlobalization


E. Globalization of Financial MarketsE. Globalization of Financial Markets-has led to-has led to

1.1. Global center competitionGlobal center competition2.2. Regulatory arbitrageRegulatory arbitrage

II.II. NATIONAL CAPITAL MARKETS NATIONAL CAPITAL MARKETS AS INTERNATIONAL CENTERS AS INTERNATIONAL CENTERS

II.II.NATIONAL CAPITAL MARKET ASNATIONAL CAPITAL MARKET AS

INTERNATIONAL CENTERSINTERNATIONAL CENTERSA.A. Principal Functions of Financial Principal Functions of Financial

CentersCenters-between savers and borrowers-between savers and borrowers1.1. To transfer purchasing powerTo transfer purchasing power2.2. To allocate fundsTo allocate funds

NATIONAL CAPITAL MARKETS NATIONAL CAPITAL MARKETS AS INTERNATIONAL CENTERSAS INTERNATIONAL CENTERS

B.B. International Financial MarketInternational Financial Market1.1. Development of most Development of most

important:important:a.a. LondonLondonb.b. New YorkNew Yorkc.c. TokyoTokyo


2.2.Other Centers for IntermediariesOther Centers for Intermediariesa.a. SingaporeSingaporeb.b. Hong KongHong Kongc.c. the Bahamasthe Bahamas


3. Prerequisites to be a financial 3. Prerequisites to be a financial centercenter

a.a. political stabilitypolitical stabilityb.b. minimal government minimal government

interventionsinterventionsc.c. legal infrastructurelegal infrastructured.d. financial infrastructurefinancial infrastructure


C.C. Foreign Access to Domestic MarketsForeign Access to Domestic Markets1. The Foreign Bond Market1. The Foreign Bond Marketa. Extension of domestic marketa. Extension of domestic marketb. Issues floated by foreign cos. b. Issues floated by foreign cos. or or governmentsgovernmentsc. Examples:c. Examples:yankee bonds, samurai yankee bonds, samurai bondsbonds


c.c. Three Major Types of Foreign Three Major Types of Foreign BondsBonds1.)1.) Fixed rateFixed rate2.)2.) Floating rateFloating rate3.)3.) Equity relatedEquity related


2.2. The Foreign Bank MarketThe Foreign Bank Marketa.a. Extension of domestic marketsExtension of domestic marketsb.b. Important funding source:Important funding source:

Japanese banks for U.S. firmsJapanese banks for U.S. firms


3.3.The Foreign Equity MarketThe Foreign Equity Marketa.a. Cross listing internationally Cross listing internationally

cancan1.) diversify risk1.) diversify risk2.) increase potential demand2.) increase potential demand3.) build base of global 3.) build base of global

owners.owners.


D.D. Downside of Global Financial Downside of Global Financial MarketsMarkets-abrupt shifts in capital flows-abrupt shifts in capital flows

II.II. THE EUROMARKETSTHE EUROMARKETS

II.II.THE EUROMARKETSTHE EUROMARKETS-the most important international -the most important international

financial markets today. financial markets today.A.A. The Eurocurrency MarketThe Eurocurrency Market

1. 1. Composed of eurobanks who Composed of eurobanks who accept/maintain deposits of accept/maintain deposits of foreign currencyforeign currency

2. 2. Dominant currency: US$Dominant currency: US$

THE EUROMARKETSTHE EUROMARKETS

B.B. Growth of Eurodollar MarketGrowth of Eurodollar Marketcaused by restrictive US governmentcaused by restrictive US governmentpolicies, especiallypolicies, especially1.1. Reserve requirements on depositsReserve requirements on deposits2.2. Special charges and taxesSpecial charges and taxes3.3. Required concessionary loan ratesRequired concessionary loan rates4.4. Interest rate ceilingsInterest rate ceilings5.5. Rules which restrict bank Rules which restrict bank competition.competition.


C.C. Eurodollar Creation involvesEurodollar Creation involves1.1. A chain of depositsA chain of deposits2.2. Changing control/usage of Changing control/usage of

depositdeposit


3.3.Eurocurrency loansEurocurrency loansa.a. Use London Interbank Offer Use London Interbank Offer Rate: Rate: LIBOR as basic rate LIBOR as basic rateb.b. Six month rolloversSix month rolloversc.c. Risk indicator: size of Risk indicator: size of margin margin between cost and between cost and raterate charged.charged.


4.4. Multicurrency ClausesMulticurrency Clausesa. Clause gives borrower option to a. Clause gives borrower option to switch currency of loan at switch currency of loan at rollover. rollover.b. Reduces exchange rate riskb. Reduces exchange rate risk


5.5.Domestic vs. Eurocurrency MarketsDomestic vs. Eurocurrency Marketsa. Closely linked rates by arbitragea. Closely linked rates by arbitrageb. Euro rates: tend to lower b. Euro rates: tend to lower

lending, lending, higher deposithigher deposit

THE EUROMARKETSTHE EUROMARKETSD.D. EurobondsEurobonds

bonds sold outside the country of bonds sold outside the country of currency currency denomination.denomination.1. Recent Substantial Market Growth 1. Recent Substantial Market Growth -due to use of swaps.-due to use of swaps. a financial instrument whicha financial instrument which gives 2 parties the right togives 2 parties the right to exchange streams of incomeexchange streams of income over time.over time.


2. Links to Domestic Bond Markets2. Links to Domestic Bond Marketsarbitrage has eliminated arbitrage has eliminated

interestinterestrate differential.rate differential.

3. Placement3. Placementunderwritten by syndicates of underwritten by syndicates of

banksbanks


4. Currency Denomination4. Currency Denominationa. Most often US$a. Most often US$b. “Cocktails” allow a basket ofb. “Cocktails” allow a basket ofcurrenciescurrencies5. Eurobond Secondary Market5. Eurobond Secondary Market -result of rising investor demand-result of rising investor demand6. Retirement6. Retirementa. sinking fund usuallya. sinking fund usuallyb. some carry call provisions.b. some carry call provisions.


7. Ratings7. Ratingsa. According to relative riska. According to relative riskb. Rating Agenciesb. Rating Agencies Moody’s, Standard & PoorMoody’s, Standard & Poor8. Rationale For Market Existence8. Rationale For Market Existencea. Eurobonds avoid governmenta. Eurobonds avoid governmentregulationregulationb. May fade as market b. May fade as market deregulatederegulate


E.E. Eurobond vs. Eurocurrency LoansEurobond vs. Eurocurrency Loans1. Five Differences1. Five Differences

a. Eurocurrency loans use variable a. Eurocurrency loans use variable ratesrates

b. Loans have shorter maturitiesb. Loans have shorter maturitiesc. Bonds have greater volumec. Bonds have greater volumed. Loans have greater flexibilityd. Loans have greater flexibilitye. Loans obtained fastere. Loans obtained faster


F.F. Note Issuance Facility (NIF) Note Issuance Facility (NIF)1. Low-cost substitute for loan1. Low-cost substitute for loan2. Allows borrowers to issue own notes2. Allows borrowers to issue own notes3. Placed/distributed by banks3. Placed/distributed by banks


G. NIFs vs. EurobondsG. NIFs vs. Eurobonds1. Differences:1. Differences:a. Notes draw down credit as neededa. Notes draw down credit as neededb. Notes let owners determine timingb. Notes let owners determine timingc. Notes must be held to maturityc. Notes must be held to maturity

IV. INTEREST RATE AND IV. INTEREST RATE AND CURRENCY SWAPSCURRENCY SWAPS

IV.IV. INTEREST RATE AND CURRENCYINTEREST RATE AND CURRENCYSWAPSSWAPSA. A. INTEREST RATE SWAPSINTEREST RATE SWAPS1. Definition1. Definitionan agreement between 2 parties toan agreement between 2 parties toexchange US$ interest paymentsexchange US$ interest paymentsfor a specific maturity on an for a specific maturity on an agreed agreed notional amount.notional amount.

INTEREST RATE AND CURRENCY INTEREST RATE AND CURRENCY SWAPSSWAPS

a. Notional principal: a reference a. Notional principal: a reference amount used only to amount used only to

calculate calculate interest expense interest expense but never repaid.but never repaid.

b. Maturities: less than 1 to over 15 b. Maturities: less than 1 to over 15 yearsyears


2. 2. Types of Interest Rate SwapsTypes of Interest Rate Swapsa. Coupon swapa. Coupon swapb. Basis swapb. Basis swap

3.3. Usage:Usage:to reduce risk potential and costs.to reduce risk potential and costs.


B.B. Currency SwapsCurrency Swaps1. Definition1. Definition

two parties exchange foreign-two parties exchange foreign-currency-currency-

denominated debt at periodic denominated debt at periodic intervals.intervals.2. Purpose: similar to parallel loan2. Purpose: similar to parallel loan


3.3. Differences of a Currency Swap:Differences of a Currency Swap:a. Currency swap is not a loana. Currency swap is not a loanb. No interest expense; no balance b. No interest expense; no balance

sheet entrysheet entryc. The right to offset any non-c. The right to offset any non-

paymentpaymentis more firmly establishis more firmly establish


4. Similarities between Interest Rate and4. Similarities between Interest Rate andCurrency SwapsCurrency Swapsa. Avoid exchange rate riska. Avoid exchange rate riskb. Exchange rate is only a reference tob. Exchange rate is only a reference to

determine amounts exchangeddetermine amounts exchanged


5. Economic Benefits of Swaps5. Economic Benefits of Swaps

when arbitrage prohibited, they when arbitrage prohibited, they

provide long-term financing.provide long-term financing.

V.V. DEVELOPMENT BANKSDEVELOPMENT BANKS

V.V. DEVELOPMENT BANKSDEVELOPMENT BANKSA. General PurposeA. General Purpose

founded by governments to help founded by governments to help finance very large finance very large

infrastructure infrastructure projects.projects.

DEVELOPMENT BANKSDEVELOPMENT BANKS

B.B. Types of Development BanksTypes of Development Banks1.1. World Bank Group includesWorld Bank Group includes

a. International Bank for a. International Bank for Reconstruction and Reconstruction and Development Developmentb. International Development b. International Development

Association Associationc. International Finance c. International Finance

Corporation Corporation

DEVELOPMENT BANKSDEVELOPMENT BANKS

B.B. Types of Development Banks (con’t)Types of Development Banks (con’t)2.2. Regional Development BanksRegional Development Banks

finance industry, agricultural, finance industry, agricultural, andand

infrastructure projectsinfrastructure projects3.3. National Development BanksNational Development Banks

concentrate on a particular concentrate on a particular industry industry or region.or region.

CHAPTER9

Documents

tokyonational capital

firmsnational capital

fundsnational capital

international centersc

international centers2

international centers3

public markets

international centersb