CHAPTER9 INTERNATIONAL FINANCING AND INTERNATIONAL FINANCIAL MARKETS

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 FUNDSOF FUNDS

II.II. NATIONAL CAPITAL MARKETS AS NATIONAL CAPITAL MARKETS AS INTERNATIONAL FINANCIAL INTERNATIONAL FINANCIAL CENTERSCENTERS

III.III. THE EUROMARKETSTHE EUROMARKETS

IV.IV. INTEREST RATE AND CURRENCY INTEREST RATE AND CURRENCY SWAPSSWAPS

V.V. DEVELOPMENT BANKSDEVELOPMENT BANKS

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

I.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 Used

1.1. Commercial Bank LoansCommercial Bank Loans

2.2. BondsBonds

a.a. Publicly issuedPublicly issued

b.b. Privately issuedPrivately issued


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

1.1. SecuritizationSecuritization

a. Definition:a. Definition:

replacing bank loans withreplacing bank loans with

securities issued in public securities issued in public

markets.markets.


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

due todue to

1.)1.) Technological Technological improvementsimprovements

2.)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 CENTERS

A.A. Principal Functions of Financial Principal Functions of Financial CentersCenters

-between savers and borrowers-between savers and borrowers

1.1. To transfer purchasing powerTo transfer purchasing power

2.2. To allocate fundsTo allocate funds

NATIONAL CAPITAL MARKETS NATIONAL CAPITAL MARKETS AS INTERNATIONAL CENTERSAS INTERNATIONAL CENTERS

B.B. International Financial MarketInternational Financial Market

1.1. Development of most Development of most important:important:

a.a. LondonLondon

b.b. New YorkNew York

c.c. TokyoTokyo


2.2.Other Centers for IntermediariesOther Centers for Intermediaries

a.a. SingaporeSingapore

b.b. Hong KongHong Kong

c.c. the Bahamasthe Bahamas


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

a.a. political stabilitypolitical stability

b.b. minimal government minimal government interventionsinterventions

c.c. legal infrastructurelegal infrastructure

d.d. financial infrastructurefinancial infrastructure


C.C. Foreign Access to Domestic MarketsForeign Access to Domestic Markets

1. The Foreign Bond Market1. The Foreign Bond Market

a. Extension of domestic marketa. Extension of domestic market

b. Issues floated by foreign cos. b. Issues floated by foreign cos. or governmentsor governments

c. Examples:c. Examples:

yankee bonds, samurai yankee bonds, samurai bondsbonds


c.c. Three Major Types of Foreign Three Major Types of Foreign

BondsBonds

1.)1.) Fixed rateFixed rate

2.)2.) Floating rateFloating rate

3.)3.) Equity relatedEquity related


2.2. The Foreign Bank MarketThe Foreign Bank Market

a.a. Extension of domestic marketsExtension of domestic markets

b.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 Market

a.a. Cross listing internationally Cross listing internationally

cancan

1.) diversify risk1.) diversify risk

2.) increase potential demand2.) increase potential demand

3.) 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 Market1. 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 Market

caused by restrictive US governmentcaused by restrictive US government

policies, especiallypolicies, especially

1.1. Reserve requirements on depositsReserve requirements on deposits

2.2. Special charges and taxesSpecial charges and taxes

3.3. Required concessionary loan ratesRequired concessionary loan rates

4.4. Interest rate ceilingsInterest rate ceilings

5.5. 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 loans

a.a. Use London Interbank Offer Use London Interbank Offer Rate: LIBOR as basic rateRate: LIBOR as basic rate

b.b. Six month rolloversSix month rollovers

c.c. Risk indicator: size of Risk indicator: size of margin between cost and margin between cost and raterate charged.charged.


4.4. Multicurrency ClausesMulticurrency Clauses

a. 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 Markets

a. Closely linked rates by arbitragea. Closely linked rates by arbitrage

b. Euro rates: tend to lower b. Euro rates: tend to lower lending, lending, higher deposithigher deposit


D.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 Markets

arbitrage has eliminated arbitrage has eliminated interestinterest

rate differential.rate differential.

3. Placement3. Placement

underwritten 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 of

currenciescurrencies5. Eurobond Secondary Market5. Eurobond Secondary Market -result of rising investor demand-result of rising investor demand6. Retirement6. Retirement

a. sinking fund usuallya. sinking fund usuallyb. some carry call provisions.b. some carry call provisions.


7. Ratings7. Ratings

a. According to relative riska. According to relative risk

b. Rating Agenciesb. Rating Agencies

Moody’s, Standard & PoorMoody’s, Standard & Poor

8. Rationale For Market Existence8. Rationale For Market Existence

a. Eurobonds avoid governmenta. Eurobonds avoid government

regulationregulation

b. May fade as market b. May fade as market deregulatederegulate


E.E. Eurobond vs. Eurocurrency LoansEurobond vs. Eurocurrency Loans

1. Five Differences1. Five Differences

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

b. Loans have shorter maturitiesb. Loans have shorter maturities

c. Bonds have greater volumec. Bonds have greater volume

d. Loans have greater flexibilityd. Loans have greater flexibility

e. 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 loan

2. Allows borrowers to issue own notes2. Allows borrowers to issue own notes

3. Placed/distributed by banks3. Placed/distributed by banks


G. NIFs vs. EurobondsG. NIFs vs. Eurobonds

1. Differences:1. Differences:

a. Notes draw down credit as neededa. Notes draw down credit as needed

b. Notes let owners determine timingb. Notes let owners determine timing

c. 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 CURRENCY

SWAPSSWAPS

A. A. INTEREST RATE SWAPSINTEREST RATE SWAPS

1. Definition1. Definition

an agreement between 2 parties toan agreement between 2 parties to

exchange US$ interest paymentsexchange US$ interest payments

for a specific maturity on an for a specific maturity on an agreed notional amount.agreed 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 Swaps

a. Coupon swapa. Coupon swap

b. Basis swapb. Basis swap

3.3. Usage:Usage:

to reduce risk potential and costs.to reduce risk potential and costs.


B.B. Currency SwapsCurrency Swaps

1. 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 loan

b. No interest expense; no balance b. No interest expense; no balance sheet entrysheet entry

c. The right to offset any non-c. The right to offset any non-paymentpayment

is more firmly establishis more firmly establish


4. Similarities between Interest Rate and4. Similarities between Interest Rate and

Currency SwapsCurrency Swaps

a. Avoid exchange rate riska. Avoid exchange rate risk

b. 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.



A. 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 projects

3.3. National Development BanksNational Development Banks

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

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CHAPTER9 INTERNATIONAL FINANCING AND INTERNATIONAL FINANCIAL MARKETS