International financial market & instruments module 3

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International Financial Market & Instruments

vishnu lal vlead college of management dhoni palakkad

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IntroductionA financial market is the mechanism that

facilitates the transfer of funds from lenders (surplus units) to borrowers (deficit units).

The institutions & instruments are integral part of financial market.

When funds flow across national boundaries and the transfer is between parties residing in different countries, there comes into existence the international financial markets.

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Motives for internationalization of financial transactionsDifference in interest ratesInternational diversificationEconomic growth prospectsExchange rate fluctuations

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Sources of international fundsMultilateral development banks or agenciesGovernment/governmental agenciesInternational banksSecurities markets

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Segments of International Financial MarketsInternational Bond MarketInternational Equity MarketInternational Money MarketInternational Credit MarketForeign Exchange Market

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Types International bondsForeign bonds & euro bondsGlobal bondsStraight bondsFloating rate notesConvertible bondsCocktail bondsCallable and puttable bondsSinking fund bonds

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Foreign bonds & euro bondsForeign bonds are underwritten by the

underwriters of the country where they are issued

Maturity based on the need of investors of a particular country.

Foreign bonds are subjected to government regulations in the country where they are issued.

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DIFFERENCESForeign Bond Euro BondIf an Indian company

issue bond in the New-York and bond is dominated in US dollar, such Bonds are called foreign bonds.

Foreign bonds underwritten by the underwriters of the country where they issued.

But in case of euro bonds they are dominated in currency other than the currency of the country where the bonds are issued.

Euro bonds underwritten by the underwriters of multi nationality

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DIFFERENCESForeign Bond Euro BondForeign bonds subjected

to governmental rules and regulations

Foreign bonds is determined keeping in mind the investors of a particular country.

Euro bonds are free from rules and regulations.

Euro bond are tailored to the needs of the multinational investors.

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Global bondsFirst it issued in 1989 by world bank It also issued by the companyIt dominated in 7 country’s currencyAustralian dollar Canadian dollarJapanese yen Swidish crona Euro

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Features Eurobondsunderwritten by an internationally.offered simultaneously to investors in a number

of countries .issued outside the jurisdiction of any single

country. they are not registered through a regulatory

agency.Make coupon payments annually.Large in size offered for simultaneous placement

in different countries

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Global bondsBonds that can be offered within the euro

market and several other markets simultaneously.

Unlike Euro bonds, global bonds can be issued in the same currency as the country of issuance.

For example, a global bond could be both issued in the United States and denominated in U.S. dollars.

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Straight bondsInterest rate is fixed known as coupon rateIt is a traditional type of bond

Its varities:--Bullet-redemption bond-Rising-coupon bond-Zero-coupon bond-Currency options-Bull and bear bonds.-Debt warrant bonds

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Floating rate notesDoes not carry fixed rate of interestInterest quoted as a premium or discount to a

reference rate(LIBOR)Interest rate revised periodically.Perpetual FRNsMinimax FRNDrop lock FRNFlip flop FRNMismatch FRNHybrid fixed rate reverse FRN

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Convertible bondsConvertible into equity sharesSome convertible bonds have detachable

warrants involving acquisition rightsAutomatic convertibility into a specified

number of shares.

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Cocktail bondsDenominated in a mixture of currencies.Represent a weighted average of 5

currenciesInvestors get currency diversification riskDepreciation offset by appreciation of other.

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ADR’SRepresents ownership in the shares of a non-

U.S. company that trades in U.S. financial markets

ADRs carry prices in US dollars, pay dividends in US dollars, And can be traded like the shares of US-

based companies.JPMorgan Citibank Deutsche Bank Bank of New York Mellon

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GDR’SGlobal Depository Receipt (GDR) - certificate

issued by international bank, which can be subject of worldwide circulation on capital markets.

GDR's are emitted by banks, which purchase shares of foreign companies and deposit it on the accounts.

Global Depository Receipt facilitates trade of shares, especially those from emerging markets.

Prices of GDR's are often close to values of related shares.

Very similar to GDR's are ADR's.

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Procedure of issueDeciding the size of the issue , the market of the

issue , price of the issue and the formalities involved.

Approaching a lead managerFulfilling the formalities and preparing the

prospectus.Depositing shares to be issued with the custodianCustodian asks depository located in foreign

country to issue DRProceeds flow from depository to custodian bank

to issuing company

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Documentation1. The prospectus2.The depository agreement3.The agreement between the custodian and

depository.4.The underwriting agreement5.A copy of the agreement with the listing

stock exchange.

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Types International Money Market Instruments

Euro notesEuro commercial paperMedium term euro notesCertificate of DepositBankers’ acceptance (BA)

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Euro notesLike PNs for obtaining short term funds.Denominated in any currency other than the

currency of the country where they are issued.

Documentation facilities are minimum.Represent Low cost funding route.Investor too prefer them in view of short

maturity.

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Euro commercial notesA short-term, debt instrumentCorporations issue euro commercial papers

in order to tap into the international money markets for their financing.

An example of a euro commercial paper is a British firm issuing debt in U.S. dollars to encourage investment from dollar-investors in international money markets.

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Medium term euro notesLonger maturity between 1 year to 5 years.Short term euro notes are allowed to roll

over.Issued to get medium term funds in foreign

currency without any need for redemption and fresh issue.

It is not underwritten yet there is provision for underwriting.

It carry fixed interest rate

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Types Medium Term Notes

Euro Medium Term Notes (EMTNs)Global Medium Term Notes

(GMTNs)

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