EURO MARKET

N M IM S M B A C a p ita l M a rke ts- 2 0 0 8 -1 0

4. Parul Bhatnagar
6. Chetan Ganatra
7. Varun Goyal
14. Saurabh Kumar
22. Amish Pansuria
24. Shreedhar Rengarajan
 Background

q International Capital market dealing in

currencies outside the country of issue
q

q Undertaken by Banks
q

q London is the largest Euro Currency Market

q

q Need arose out of the desire to hide the

identity of the asset holder
q
 Factors Contributing to the
Growth
 Regulation ‘M’ of the Federal Reserve Bank


 Regulation ‘Q’ of the Federal Reserve Act



 Tax Regulations by the US monetary authority




Characteristics of Euro Currency
Market
 This market is made up of borrowing and lending of currencies
outside the country of issue


 It is unregulated, uninsured and unsecured



 Small number of operators dealing in large volumes



 Highly competitive market



 Investors prefer short term deposits and borrowers want long term
loans


 Loans are indexed against the LIBOR with a mark up for profit


 It is made up of four components: Euro Currency deposit market,

Euro currency credit market, Euro currency bond market, Euro
currency notes market.
 London Interbank Reference
Rate
The London Interbank Offered Rate is a daily reference rate
based on the
interest rates at which banks borrow unsecured funds from other
banks in the
London wholesale money market.

 LIBOR rates are provided for periods of up to 12 months. The

most common rates
 are the daily, weekly, one month, six month, and one year.
LIBOR rates are also
 provided in ten currencies, including the US dollar, Japanese yen,
Euro, and
 Pound Sterling.
 Calculation of LIBOR
 Libor is an average of actual rates used by banks -


q The British Banker’s Association (BBA), surveys a variety of

banks that reflect the general market.
q The BBA then surveys the different banks’ interbank interest
rate quotes. These
 quotes are made available to the public.
q The 2 highest and 2 lowest quotations are ignored and the
average of the remaining 8 is
 declared as the LIBID-LIBOR quotation for that day.
 Average of these 2 rates is called LIMEAN.

These rates imply the market rates.

All transactions in the euro currency market are indexed against

these rates.
 Loan Syndication
A syndicated loan is provided by a group of lenders and is
structured, arranged,
and administered by one or several commercial or investment
banks known as
arrangers.

 Advantages:
 Need for large amounts
 Time constraints
 Network building
 Can be cancelled any time
 Early repayment
 Single or staggered maturity
 Different tranches with different maturities



 Process of Loan Syndication
Lo a n
LM d e cid e s
U n d e rw ritin g
th e te rm s &
B ank co n d itio n s o f
th e Lo a n
Pro je ct Im p le m e n ta tio
B ank B ank
In ve sto
r B ank

Pa rticip a tin g B a n k
 Euro Bond Market

 The Eurobond market is the

market for long-term debt
instruments issued and traded
in the offshore market.


 A Eurobond is an
international bond that is
denominated in a currency not
native to the country where it is
 Advantages of Eurobond
Market
 Eurobond market often allows firms to issue bonds
more quickly and with lower disclosure costs.
 For institutional investors, the Eurobond market
offers a greater variety of high-quality issuers,
ease of clearing and settlement, and larger issues
with good liquidity.
 The retail investor often sacrifices yield, apparently
in exchange for a bearer instrument with no
withholding taxes and no disclosures made to the
tax authorities.
 In particular, investors whose base currency is not
the US$ may be more willing to sacrifice yield
when they expect foreign exchange gains from a
Foreign Bonds
 In International market bonds are classified
as Foreign/Offshore.


 Foreign Bond is a debt instrument sold by a

foreign entity in the local currency with the
approval of local regulation authorities.

 Major Foreign bonds are-
 Yankee Bonds
 Bulldog Bonds
 Samurai Bonds

Foreign Bonds
 Yankee Bonds-
 These are instruments sold by a
foreign borrower in the U.S denominated in
USD.
 If the bonds are sold through private
placement only to specific institutional
investors and the bonds are tradable only on
OTC basis then they are called sec144A
bonds.


 Bulldog Bonds –
 These are instruments sold by a
foreign borrower in the U.K denominated in
GBP.
 Foreign Bonds

 Samurai Bonds
 These instruments are sold
by foreign borrowers in Japan,
denominated in JPY with the approval of
the Japanese regulatory authority.
 If the bonds are sold through private
placement only to specific institutional
investors and the bonds are tradable only
on OTC basis then they are called
Shibosai Bonds.
 Offshore Bonds
q Offshore bonds are debt instruments sold by foreign
borrowers in one or markets simultaneously, in a
non resident currency.
q
q No approval required from local authorities.
q
q Such bonds are issued on bearer loans and are not
subject to provisions of month holding tax.
q
q Example:- Air India selling bonds in UK, Germany,
Switzerland and Sweden; denominated in USD.
 Types of Offshore Bonds
q Straight Bonds:
q Bonds issued by borrowers with very good credit rating
q Long maturities extending to 50 years
q Carry fixed rate of interest, paid half yearly through life
time
q Principal redeemed in full at maturity.
q
q Sinking Fund Bonds:
q Such bonds are issued by borrowers with average credit
rating.
q Repayment of principle through annual installments during
the life of the bond.
q Thus the half yearly coupon carries both the interest
portion and principal portion.
q The intention is to assure investors regarding the solvency
of the issuer.
q
 Types of Offshore Bonds
q Junk Bonds:
q These bonds are issued by borrowers with very low
credit rating.
q Thus carry a very high rate of interest
q Such instruments are purchased for short term
investments
q
q Bonds with Options
q Bonds with Call Options: Such bonds provide the issuer
the right to repay the principal before actual
maturity.
q Bonds with Put Options: Such bonds provide the investor
the right to get redemption of the principal before
actual maturity.
q
 Types of Offshore Bonds
q Floating Rate Bonds:
q Bonds that provide a variable interest rate are floating
rate bonds.
q There are bonds that provide a ceiling rate of interest
which indicate the maximum liability of interest
payments for the issuer
q There are bonds that provide a floor rate of interest
which represents the minimum level of return that
the investor gets.
q
q Deep Discount Bonds:
q These are bonds that are issued for long maturities at a
discount to face value and the redemption is done at
the face value.
q The difference represents the interest income to the
EURO Currency Notes Market

Definition :-


Short term bonds sold by a borrower directly to

the investors
with or without the underwriting support of
commercial banks
 Types of Notes
 Euro Commercial Papers (ECPs)


 Note Issuance Facilities (NIFs)



 Euro Medium Term Notes (EMTNs)

 Implementation of Euro Currency
concept in India
 Benefits:-


 Increases efficiency of the local forex market



 Provides an alternate source of finance to importers and

exporters


 Provides Indian banks access to foreign currency resources at

competitive
 rates


 Provides NRI’s with alternate investment avenues



 Provides the country with additional revenue and forex

reserves


 Gives Indian banking exposure to complex and sophisticated

international
 

 THANK YOU !!!