Chapter 4 Page 1 of 13

INTERNATIONAL FINANCIAL MARKETS

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 givencompany, under specific circumstances, one method of financing
may be preferred to the other. The major differences are:1 . C o s t o f b o r r o w i n g Euro
bonds are issued in both fixed rate and floating rate forms. Fixed rate bonds are an
attractive exposuremanagement tool since the known long-term currency inflows can be offset by
the known long-term outflows inthe same currency. In contrast, Euro currency loans carry variable
rates.2 . M a t u r i t y Euro bonds have longer maturities while the period of
borrowing in the Euro currency market has tended to lengthen over time.3 . S i z e o f t h e
i s s u e Earlier, the funds available for lending at any time have been much more in the inter-bank
market than in the bondmarket. But of late, this situation does not hold true. Moreover, although in the
past the flotation costs of a Eurocurrency 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 . F l e x i b i l i t y 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
rateloan can be staggered to
suit the borrowers 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
currencieson any roll-over date, whereas switching the denomination of a Euro bond from currency A
to currency B wouldrequire a costly, combined, refunding and reissuing
operation.5 . S p e e d Funds can be raised by a known borrower very quickly in the Euro
currency market. Often, a period of two tothree weeks should suffice. A Euro bond financing
generally takes more time, though the difference is becomingless significant.
2.Euro Credit Market
Euro credit or Euro Loans are the loans extended for one year or longer. The market that deals in such
loans iscalled Euro Credit Market.The common maturity for euro credit loans is 5 years. Since Euro
banks accept short-term deposits and providelong-term loans, it is likely that asset liability mismatch
may arise. To avoid this Euro banks often extend floatingrate euro credit loans fixed to some market
interest rate. The London Inter Bank Offer Rate (LIBOR) is the mostcommonly used interest rate. It
is the rate charged for loans between Euro Banks.
Participants in Euro credit Market
The major lending banks in the Euro credit market are Euro banks, American, Japanese, British,
Swiss, French,German and Asian (specially that of Singapore) banks, Chemical Bank, JP
Morgan, Citicorp, Bankers Trust,Chase Manhattan Bank, First National Bank of Chicago,
Barclay's Bank, National Westminster, BNP, etc. Amongthe borrowers, there are banks, multinational
groups, public utilities, government agencies, local authorities, etc.
1

Chapter 4 Page 2 of 13
Dealing in Euro credits
When a borrower approaches a bank for Euro credit, a formal document is prepared on
behalf of potential borrowers. This document contains the principal terms and conditions of
loan, objectives of loan and details of the borrower.Before launching syndication, the approached bank
decides primarily, in consultation with the borrower, on astrategy to be adopted, i.e. whether to
approach a large market or a restricted number of banks to form the syndicate. Each of the
banks in syndicate lends a part of the loan. The duration of this operation is normally about6 to 8
weeks. 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;
Exchange option clause
that allows the withdrawal of a part or totality of loan in another currency;
Negative guarantee clause
that commits the borrower not to contract other debts that subordinate the interest of lenders.
Characteristics of Euro credit
A major part (more than 80 %) of the Euro debts is made in US dollars. The second (but
far behind) is PoundSterling followed by Deutsch mark, Japanese yen, Swiss
franc and others. Most of the syndicated debts are of the order of $50 million. As far as the upper
limits are concerned, amountsinvolved are of as high magnitude as $5 billion and more. In 1990, Euro
tunnel borrowed $6.8 billion.On an average, maturity periods are of about five years (in some cases it
is about 20 years). The reimbursement of the loan may take place in one go (bullet) or in several
installments. The interest rate on Euro debt is calculated with respect to a rate of reference, increased
by a margin (or spread).The rates are available and generally renewable (roll over credit)
every six months, fixed with reference to LIBOR. The LIBOR is the rate of money market
applicable to short-term credits among the banks of London. Thereference rate can equally be PIBOR
at Paris and FIBOR at Frankfurt, etc. It is revised regularly.The margin depends on the supply and
demand of the capital as also on the degree
of the risk of these credits andthe rating of borrowers. Financial institutions are in vigorous
competition. There is an active secondary market of Euro debts. Numerous techniques allow
banks to sell their titles in this market.
3.Euro Bond Market
Euro Bond issue is one denominated in a particular currency but sold to investors in national capital
markets other t h a n t h e c o u n t r y
t h a t i s s u e d t h e d e n o m i n a t i n g c u r r e n c y. A n e x a m p l e i s a D u t c h b o r r o w e r i s s u i
n g D M - denominated bonds to investors in the UK, Switzerland and the Netherlands.The Eurobond
market is the largest international bond market, which is said to have originated in 1963 with anissue

of Eurodollar bonds by Autostrade, an Italian borrower. The market has since grown enormously in
size andwas worth about $ 428 billion in 1994.Eurobond markets in all currencies except the Japanese
Yen are quite free from any regulation by the
respectiveg o v e r n m e n t s . S t r a i g h t b o n d s a r e p r i c e d w i t h r e f e r e n c e t o a b e n c h m a r
k , t y p i c a l l y t r e a s u r y i s s u e s . T h u s a Eurodollar bond will be priced to a yield a YTM
(Yield-to-Maturity) somewhat above the US treasury bonds of similar maturity, the spread depending
upon the borrowers ratings and market conditions.Floatation costs of the Eurobond are comparatively
higher than costs indicated with syndicated Eurocredits.
4. Euro CPs
Commercial paper is a corporate short-term, unsecured promissory note issued on a discount to yield
basis.Commercial paper maturities generally do not exceed 270 days. Commercial paper represents a
cheap and flexiblesource of funds While CPs are negotiable, secondary markets tend to be not very
active since most investors holdthe paper to maturity.
2

Chapter 4 Page 11 of 13
In general, international projects are prone to greater financial risk as a bulk of finance is in the form
of debt. Themajor factors affecting financial risk are degree of indebtedness, the terms and conditions
of repayment of debtand currency used.Some projects will have expenses and revenues that involve
several currencies. As a result the exchange rate risk is very high.Projects maybe financed with
floating rates. In view of the volatility observed on the rates like LIBOR, the interest rate
risk is also significant. Therefore it is necessary to plan the coverage of all these risks.2 . F o r e i g n
E x c h a n g e R i s k As corporations expand their international activities, they begin to acquire
foreign assets and foreign liabilities. Asexchange rates change, the values of these foreign assets and
liabilities change accordingly. For a corporation,exchange rate risk is the sensitivity of the value of the
corporation when the exchange rates change. Obviously,the change in the corporation value is
related to the net change in the values of the foreign assets and foreign liabilities. (E.g.
foreign direct investment, foreign exchange loss, sales and income from foreign
sources.)3 . E c o n o m i c R i s k Economic risk is risk created by changes in the economy.
Typically, it is related to technological changes, theactions of competitors, shifts in consumer
preferences, etc. Ideally, a pure domestic firm is affected only by domestic economic
conditions - the domestic economic risk. However, in today's integrated world economy, theconcept
of a pure domestic firm has less practical relevance. Many firms that appear strictly
pure domesticconfront foreign economic risk indirectly. (E.g.: local restaurant/dept store, real estate
agent)4 . P o l i t i c a l R i s k Political risk is risk created by political changes or
instability in a country. These factors include, but are notlimited to, nationalization,
confiscation, price controls, foreign exchange and capital controls,
administrativehurdles, uncertain property rights, discriminative or arbitrary regulations on business
practices (hiring, contractnegotiation), civil wars, riots, terrorism, etc. Each country in the world
presents a different political profile
andr e p r e s e n t s a u n i q u e s o u r c e o f p o l i t i c a l r i s k t h a t f i r m s m u s t a s s e s s a n d
m a n a g e w h e n t h e y m a k e f o r e i g n investments.In order to minimize this risk, local
investors or the local government may be associated with the project. Insurance against
political risk is another useful technique recommended for the purpose.
What constitutes political risk and how to measure it?
The political risk management typically involves:- Identifying political risk and its likely
consequences- Developing policies in advance to cope with the possibility of political risk Strengthening a firm's bargaining position- Devising measures to maximize compensation in the event
of expropriationCountry Risk: It refers to elements of risk inherent in doing business in
the economic, social, and political environment of another country.
5.
Counter party Risk - The risk that a counter party will default on a financial obligation.

6.
Liquidity Risk -The risk that a financial position cannot be sold quickly at prevailing prices.
7.
Delivery Risk - The risk that a buyer will not deliver payment of funds after a seller has delivered
securities or foreign exchange that were purchased.
8.
Rollover Risk - The risk of being closed out from a financial market and unable to
renew (or roll over) ashort-term contract.
11

Chapter 4 Page 12 of 139.

Other risks - Other risks relate to the risk of cost overruns and bad management.
3.Financing of MNCs in local or international market
Project financing may be defined as financing of an economic unit, legally independent, created with
a view tosetting up of a big project, which is commercially profitable and financially viable.Project
is considered as a distinct legal entity and is financed, to a marked extent, by debt (65
to 75 percent).Therefore the risk to be borne is substantial.There are two major methods of
financing international projects:1.Financing with total risk borne by lenders where only the
future cashflows ensure the reimbursement of theloan. This method of financing was
used in petroleum and gas industry in the USA and Canada. Due to increased level of risks,
this method of project financing is generally not preferred.2 . I n a n o t h e r t y p e o f f i n a n c i n g ,
both the lender and the promoter share the risk. The problem
s o m e t i m e s encountered in this method is to decide the proportion in which the risk is to be shared
between two parties.
Domestic v/s Offshore markets
Financial assets and liabilities denominated in a particular currency - say the Swiss
Franc - are traded are primarily in the national financial markets of that country. These
financial markets are known as Domestic Markets.In case of many convertible
currencies they are traded in the financial markets outside the country of that currency.
These financial markets are known as Offshore Markets.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, it is true generally that a given entity has an access to both the segments of
themarkets for placing as well as raising funds.There are theories by experts that suggest that
there are no two types of financial markets (
viz.

Domestic andoffshore markets) but everything is a part of single Global

Financial Market.SimilarityExperts suggest that arbitrage will ensure that both these
markets will be closely linked together in terms of
costs of funding and returns on assets.
DifferencesBoth of these markets significantly differ on the Regulatory dimension. Major segments
of the domestic marketsare subject to strict supervision by the relevant authorities such as SEC in US,
Ministry of Finance in Japan andthe Swiss National Bank in Switzerland. These authorities regulate
foreign (non-resident) entities access to the public capital markets in their countries by laying down
eligibility criteria, disclosure & accounting norms andregistration & rating requirements (similarly for
domestic banks, reserve requirements and deposit insurance).The offshore markets on the other hand
have minimal regulation and often no registration.Finally it must be noted that though the nature of
regulation continues to distinguish Domestic from the offshoremarkets, there are segments like
Private Placements, Unlisted Bonds, Bank loans etc. in domestic markets whereregulation tends to be
the least.
4. Eurocurrency Markets
12

Chapter 4 Page 13 of 13
While opening up of the domestic markets began only around the end of seventies, a truly
international financialmarket had already been born in the mid-fifties and gradually grown
in size and scope during sixties and seventies. This refers to the well-known Eurocurrencies
Market. It is the largest offshore market.Prior to 1980, Eurocurrencies market was the only truly
international financial market of any significance. It
ismainly an inter-bank market trading in time deposits and various debt instruments. What matters is
the location of the bank neither the ownership of the bank nor ownership of the deposit. The prefix
"Euro"
is now outdated sincesuch deposits and loans are regularly traded outside Europe.Over the years,
these markets have evolved a variety of instruments other than time deposits and short-term loans,e.g.
certificates of deposit (CDs), euro commercial paper (ECP), medium- to long- term
floating rate loans,eurobonds, floating rate notes and euro medium-term notes (EMTNs).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. Added to this are the
considerations mentioned above, viz. the ability of euro banksto offer better rates both to the
depositors and the borrowers and convenience of dealing with a bank that is closer to home, who is
familiar with business culture and practices in Europe.
5. External Bond Market
The external bond market refers to bond trading activity wherein the bonds are underwritten by an
internationalsyndicate, are offered in several countries simultaneously, are issued outside any
country's jurisdiction, and arenot registered. The Eurobond market is a major external bond market.
The external bond market combined withthe internal bond market comprises the global bond market.
Examples of an external bond are the "global bond,"issued by the World Bank, and Eurodollar bonds.The
External Bond Market comprises of the :

Foreign Bond Market and

Euro Bond MarketForeign Bond: issue is one offered by a foreign borrower to the
investors in a national capital market and denominated in that nations currency. An example is

German MNC issuing dollar denominated bonds to the U.S.investors.Euro Bond: issue is one
denominated in a particular currency but sold to investors in national capital
marketsother than the country that issued the denominating currency. An example is a
Dutch borrower issuing DM-denominated bonds to investors in the UK, Switzerland and
the Netherlands

Chapter 4 Page 11 of 13
In general, international projects are prone to greater financial risk as a bulk of finance is in the form
of debt. Themajor factors affecting financial risk are degree of indebtedness, the terms and conditions
of repayment of debtand currency used.Some projects will have expenses and revenues that involve
several currencies. As a result the exchange rate risk is very high.Projects maybe financed with
floating rates. In view of the volatility observed on the rates like LIBOR, the interest rate
risk is also significant. Therefore it is necessary to plan the coverage of all these risks.2 . F o r e i g n
E x c h a n g e R i s k As corporations expand their international activities, they begin to acquire
foreign assets and foreign liabilities. Asexchange rates change, the values of these foreign assets and
liabilities change accordingly. For a corporation,exchange rate risk is the sensitivity of the value of the
corporation when the exchange rates change. Obviously,the change in the corporation value is
related to the net change in the values of the foreign assets and foreign liabilities. (E.g.
foreign direct investment, foreign exchange loss, sales and income from foreign
sources.)3 . E c o n o m i c R i s k Economic risk is risk created by changes in the economy.
Typically, it is related to technological changes, theactions of competitors, shifts in consumer
preferences, etc. Ideally, a pure domestic firm is affected only by domestic economic
conditions - the domestic economic risk. However, in today's integrated world economy, theconcept
of a pure domestic firm has less practical relevance. Many firms that appear strictly
pure domesticconfront foreign economic risk indirectly. (E.g.: local restaurant/dept store, real estate
agent)4 . P o l i t i c a l R i s k Political risk is risk created by political changes or
instability in a country. These factors include, but are notlimited to, nationalization,
confiscation, price controls, foreign exchange and capital controls,
administrativehurdles, uncertain property rights, discriminative or arbitrary regulations on business
practices (hiring, contractnegotiation), civil wars, riots, terrorism, etc. Each country in the world
presents a different political profile
andr e p r e s e n t s a u n i q u e s o u r c e o f p o l i t i c a l r i s k t h a t f i r m s m u s t a s s e s s a n d
m a n a g e w h e n t h e y m a k e f o r e i g n investments.In order to minimize this risk, local
investors or the local government may be associated with the project. Insurance against
political risk is another useful technique recommended for the purpose.
What constitutes political risk and how to measure it?
The political risk management typically involves:- Identifying political risk and its likely
consequences- Developing policies in advance to cope with the possibility of political risk Strengthening a firm's bargaining position- Devising measures to maximize compensation in the event
of expropriationCountry Risk: It refers to elements of risk inherent in doing business in
the economic, social, and political environment of another country.
5.
Counter party Risk - The risk that a counter party will default on a financial obligation.
6.
Liquidity Risk -The risk that a financial position cannot be sold quickly at prevailing prices.
7.
Delivery Risk - The risk that a buyer will not deliver payment of funds after a seller has delivered
securities or foreign exchange that were purchased.
8.
Rollover Risk - The risk of being closed out from a financial market and unable to
renew (or roll over) ashort-term contract.
11

Chapter 4 Page 12 of 139.

Other risks - Other risks relate to the risk of cost overruns and bad management.
3.Financing of MNCs in local or international market
Project financing may be defined as financing of an economic unit, legally independent, created with
a view tosetting up of a big project, which is commercially profitable and financially viable.Project
is considered as a distinct legal entity and is financed, to a marked extent, by debt (65
to 75 percent).Therefore the risk to be borne is substantial.There are two major methods of
financing international projects:1.Financing with total risk borne by lenders where only the
future cashflows ensure the reimbursement of theloan. This method of financing was
used in petroleum and gas industry in the USA and Canada. Due to increased level of risks,
this method of project financing is generally not preferred.2 . I n a n o t h e r t y p e o f f i n a n c i n g ,
both the lender and the promoter share the risk. The problem
s o m e t i m e s encountered in this method is to decide the proportion in which the risk is to be shared
between two parties.
Domestic v/s Offshore markets
Financial assets and liabilities denominated in a particular currency - say the Swiss
Franc - are traded are primarily in the national financial markets of that country. These
financial markets are known as Domestic Markets.In case of many convertible
currencies they are traded in the financial markets outside the country of that currency.
These financial markets are known as Offshore Markets.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, it is true generally that a given entity has an access to both the segments of
themarkets for placing as well as raising funds.There are theories by experts that suggest that
there are no two types of financial markets (
viz.
Domestic andoffshore markets) but everything is a part of single Global
Financial Market.SimilarityExperts suggest that arbitrage will ensure that both these
markets will be closely linked together in terms of
costs of funding and returns on assets.
DifferencesBoth of these markets significantly differ on the Regulatory dimension. Major segments
of the domestic marketsare subject to strict supervision by the relevant authorities such as SEC in US,
Ministry of Finance in Japan andthe Swiss National Bank in Switzerland. These authorities regulate
foreign (non-resident) entities access to the public capital markets in their countries by laying down
eligibility criteria, disclosure & accounting norms andregistration & rating requirements (similarly for
domestic banks, reserve requirements and deposit insurance).The offshore markets on the other hand
have minimal regulation and often no registration.Finally it must be noted that though the nature of

regulation continues to distinguish Domestic from the offshoremarkets, there are segments like
Private Placements, Unlisted Bonds, Bank loans etc. in domestic markets whereregulation tends to be
the least.
4. Eurocurrency Markets
12

Chapter 4 Page 13 of 13
While opening up of the domestic markets began only around the end of seventies, a truly
international financialmarket had already been born in the mid-fifties and gradually grown
in size and scope during sixties and seventies. This refers to the well-known Eurocurrencies
Market. It is the largest offshore market.Prior to 1980, Eurocurrencies market was the only truly
international financial market of any significance. It
ismainly an inter-bank market trading in time deposits and various debt instruments. What matters is
the location of the bank neither the ownership of the bank nor ownership of the deposit. The prefix
"Euro"
is now outdated sincesuch deposits and loans are regularly traded outside Europe.Over the years,
these markets have evolved a variety of instruments other than time deposits and short-term loans,e.g.
certificates of deposit (CDs), euro commercial paper (ECP), medium- to long- term
floating rate loans,eurobonds, floating rate notes and euro medium-term notes (EMTNs).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. Added to this are the
considerations mentioned above, viz. the ability of euro banksto offer better rates both to the
depositors and the borrowers and convenience of dealing with a bank that is closer to home, who is
familiar with business culture and practices in Europe.
5. External Bond Market
The external bond market refers to bond trading activity wherein the bonds are underwritten by an
internationalsyndicate, are offered in several countries simultaneously, are issued outside any
country's jurisdiction, and arenot registered. The Eurobond market is a major external bond market.
The external bond market combined withthe internal bond market comprises the global bond market.
Examples of an external bond are the "global bond,"issued by the World Bank, and Eurodollar bonds.The
External Bond Market comprises of the :

Foreign Bond Market and

Euro Bond MarketForeign Bond: issue is one offered by a foreign borrower to the
investors in a national capital market and denominated in that nations currency. An example is
German MNC issuing dollar denominated bonds to the U.S.investors.Euro Bond: issue is one
denominated in a particular currency but sold to investors in national capital
marketsother than the country that issued the denominating currency. An example is a
Dutch borrower issuing DM-denominated bonds to investors in the UK, Switzerland and
the Netherlands
International Financial MarketsI n t e r n a t i o n a l F i n a n c i a l M a r k e t s s e r v e a s l i n k s
b e t w e e n t h e f i n a n c i a l m a r k e t s o f e a c h individual country and as independent markets
outside the jurisdiction of any one country.The market for currencies is the heart of this
international financial market. Internationaltrade and investment are often denominated
in a foreign currency, so the purchase of the currency precedes the purchase of goods, services,
or assets.T h i s p a r t o f a s s i g n m e n t p r o v i d e s s o m e k i n d o f d e t a i l e d g u i d e

t o t h e s t r u c t u r e a n d functions of the foreign currency markets,

i n t e r n a t i o n a l m o n e y m a r k e t s , i n t e r n a t i o n a l capital markets and international securities
markets.The Foreign Currency MarketsThe market for foreign currencies is a world wide
market that is informal in structure. This means that it has no central place, pit, or floor of the
New York exchange, where thetrading takes place. The market is the actually the
thousands of telecommunicationslike among financial Institutions around the globe,
and it is open 24 hours a day. Some one, some where, is nearly always open for business.Market
size & CompositionU n t i l r e c e n t l y t h e r e w a s l i t t l e d a t a o n t h e a c t u a l v o l u m e o f
t r a d i n g o n w o r l d f o r e i g n currency markets. Starting in the spring of 1986, however,
the Federal Reserve Bank of New York, along with other industrial countries central banks
through the auspices of the bank for International Settlements (BIS), started surveying the activity of
currency tradingevery three years.Growth of foreign currency trading has been nothing less
than astronomical. The surveyresults for the month of April 1998 indicate that daily
foreign currency trading on worldsmarkets exceeded $1,500,000,000,000 (a trillion
with a t). In comparison, the annual (not d a i l y ) U . S . g o v e r n m e n t b u d g e t d e f i c i t
h a s n e v e r e x c e e d e d $ 3 0 0 b i l l i o n , a n d t h e U . S merchandize trade deficit has never
topped $200 billion.The majority of the worlds trading in foreign currencies is still taking
place in the citieswhere international financial activity is centered: London, New York, and
Tokyo. A recents u r v e y b y t h e U . S F e d e r a l R e s e r v e o f c u r r e n c y t r a d i n g b y
financial institutions
andi n d e p e n d e n t b r o k e r s i n N e w Y o r k r e v e a l s a d d i t i o n a l i n f o r m
a t i o n o f i n t e r e s t . Approximately 66% of currency trading occurs in the morning
hours (Eastern StandardTime), with 29% between noon & 4 p.m., and the remaining percent
between 4 p.m., and8 a.m. the next day.The reasons typically given for the enormous growth in
foreign currency trading
are:1 . D e r e g u l a t i o n o f I n t e r n a t i o n a l C a p i t a l F l o w s : i t i s e a s i e r
t h a n e v e r t o m o v e currencies and capital around the world without major
governmental restrictions.
Most of the deregulation that has characterized government policy over the past 1 0 t o
15 years un the United States, Japan and the now European Union
h a s focused on financial deregulation.2 . G a i n s i n T e c h n o l o g y
a n d T r a n s a c t i o n C o s t E f f i c i e n c y : i t i s f a s t e r , e a s i e r , a n d cheaper to
m o v e m i l l i o n s o f d o l l a r s , y e n o r m a r k s a r o u n d t h e w o r l d t h a n e v e r before.
Technological advancements not only in the dissemination of information, but also in the conduct
of exchange or trading, have added greatly to the ability of i n d i v i d u a l s w o r k i n g o n
t h e s e m a r k e t s t o c o n d u c t i n s t a n t e o u s a r b i t r a g e ( s o m e would say speculation).
3.
The World is a Risky place: Many argue that the financial markets have
becomeincreasingly volatile over recent years, with larger & faster swings in
financialv a r i a b l e s s u c h a s s t o c k v a l u e s a n d i n t e r e s t r a t e s a d d i n g t o t h e
m o t i v a t i o n s f o r moving more capital as faster rates.International Money MarketsA money
market traditionally is defined as a market for deposits, accounts, or securitiesthat have
maturities of one year or less. The international money markets, often termedthe Euro
currency markets, constitute an enormous financial market that is in many waysout side
the jurisdiction and supervision of world financial and governmental authorities.Euro Currency
MarketsAnd Euro currency market is
any
money market for depositing and borrowing moneylocated outside the country where
that money is legal tender. Eurocurrencies are bank deposits and loans residing outside any
single country,

Floating rate pricing: Usually with maturities less than five years

Few regulatory restrictions: Because they are outside the jurisdiction of any singlegovernment

Competitive pricing: More than $2.5 trillion outstandingF o r e x a m p l e , U . S . D o l l a r s t h a t a r e

h e l d o n a c c o u n t i n a b a n k i n L o n d o n a r e t e r m e d Eurodollars. Similarly, Japanese
Yen held on account in a Parisian financial institution w o u l d b e c l a s s i f i e s a s
E u r o y e n . T h e e u r o p r e f i x d o e s n o t m e a n t h e s e c u r r e n c i e s o r accounts
are only European, as German marks on account in Singapore would also be classified as
a Euro currency, a Euro account.The Eurocurrency market uses floating rate pricing, and

Low interest rate risk: Interest rates tied to a variable rate base such as the LondonInterbank Offer
Rate (LIBOR)

Low default risk: Traded between large commercial banks, investment banks, andmultinational
corporations

Relatively short maturities: Typically less than 5 yearsThe Eurocurrency market has few regulations.
Typically, there are

No reserve requirements

No interest rate regulations or caps

No withholding taxes

No deposit insurance requirements

No credit allocation regulations

Less stringent disclosure requirementsInternational Capital MarketsJust as with the money markets,
the international capital markets serve as links among thecapital markets of individual
countries, as well as constituting a separate market of their own, the capital market that
flows in to the euro markets. Firms can now raise capital, debit or equity, fixed or floating
interest rates, in any of a dozen currencies, for maturitiesranging from one month to thirty
years, in the international capital markets.
Althoughi n t e r n a t i o n a l c a p i t a l m a r k e t s t r a d i t i o n a l l y h a v e b e e n d o m i n a t e d b y d
e b t i n s t r u m e n t s , international equity markets have shown considerable growth in recent
years.International Security MarketsAlthough banks are continuing to provide a large
portion of the international financialneeds of government and business, it is the
international debt securities markets that haveexperienced the greatest growth in the
past decade. The International Security Markets include bonds, equities, and private
placements