1. WORLD FINANCIAL MARKETS
Financial markets Goswami FNGB 7451
WORLD FINANCIAL MARKETS
Objectives:
Eurocurrency Market
Eurobond Market
Asian Dollar Market
SDR (1 SDR = x1$ + x2DM + x3FF + x4 £ + x5¥)
ECU / Euro

2. WORLD FINANCIAL MARKETS
Financial markets Goswami FNGB 7451
WORLD FINANCIAL MARKETS
Eurocurrency Market a. Offshore
b. Time Deposit
c. $, DM, FF, ¥, SF,, £
Eurodollar Market
a. Largest component of Eurocurrency Market
b. Evolution - Marshall Plan
- Cold War
- Higher Yield
- £ Crisis of 1957
- US B/P Deficit in ‘60s

3. WORLD FINANCIAL MARKETS
Financial markets Goswami FNGB 7451
WORLD FINANCIAL MARKETS
Eurodollar Market (cont.)
- Interest Equalization Tax (63 -74)
- Voluntary Restrictions ( )
- Mandatory Restrictions ( ) OFDI (Office of Foreign Direct Investment)
- Restrictions on Capital Outflow
- Regulation Q ( ) / M
- Petrodollar Deposit by Arab Countries
( ) Recycling LDC Debt Problem
F.C.R.P Foreign Credit Restraint Program

4. WORLD FINANCIAL MARKETS
Financial markets Goswami FNGB 7451
WORLD FINANCIAL MARKETS
Eurodollar Market (cont.)
c. Operation:
- type: CD (overnight Yrs.)
- Marketable or Negotiable Instruments
Secondary Markets (ICDMA)
- Tap CD
Tranche CD
SDR CD
- Rate:

5. WORLD FINANCIAL MARKETS
Financial markets Goswami FNGB 7451
WORLD FINANCIAL MARKETS
Interest Rate Structure in the Eurocurrency Market:
LIBOR = London Interbank Offer Rate
LIBID = London Interbank Bid Rate
Interbank, or Funding Spread
Lending Spread: short term loans in the Eurocurrency market are typically priced at LIBOR plus a spread. The bank can fund the loan at LIBID, earn a 1/8% funding spread, and also earn the lending spread

6. WORLD FINANCIAL MARKETS
Financial markets Goswami FNGB 7451
WORLD FINANCIAL MARKETS
Interest Rate Structure in the Eurocurrency Market:
Domestic Lending Rate (PRIME): The rate charged by banks for loans in the domestic market
A: The advantage to a customer in favor of borrowing in the external market A
External Market Lending Rate (Fed Fund Rate): The rate charged on banks loans in the external market
B: LENDING SPREAD The spread paid by the customer over LIBOR on external market loans B
LIBOR: The rate at which a Euromarket bank is willing to place a deposit at another Euromarket bank
C: INTERBANK SPREAD The difference between a bank’s bid and offer rate for deposits in the external market (usually 1/8%)
LIMEAN (London Interbank Mean Rate): The average of LIBOR and LIBID C
LIBID (London Interbank Bid Rate): The rate that a Euromarket bank is willing to pay to attract a deposit from another Euromarket bank
D: The advantage to a depositor for placing a deposit in the external market D
Domestic Deposit Rate: The rate that a bank pays for a deposit in the domestic market

7. WORLD FINANCIAL MARKETS
Financial markets Goswami FNGB 7451
WORLD FINANCIAL MARKETS
Interest Rate Structure in the Eurocurrency Market:
LIBOR Spread is lower:
- Lack of reserve requirement
- Regulatory expenses
- No governmental intervention at concessionary rates
- Most borrowers are well known
- High volumes / lower margins
- Some tax profits

8. WORLD FINANCIAL MARKETS
Financial markets Goswami FNGB 7451
WORLD FINANCIAL MARKETS
Eurodollar Market (cont.)
e. Participants:
Supply: Swiss Banks
Central Banks
Institutional Investors
Demand: Governments
MNC’s
Speculators

9. WORLD FINANCIAL MARKETS
Financial markets Goswami FNGB 7451
WORLD FINANCIAL MARKETS
Eurodollar Market (cont.)
e. Advantages: Narrower Interest Rate Spread
Lower Loan Rates: Wholesale Nature
Borrower’s Credit
Higher Deposit Rates: No Reserve Requirement
No Interest Ceiling
No SEC or FDIC

10. WORLD FINANCIAL MARKETS
Financial markets Goswami FNGB 7451
WORLD FINANCIAL MARKETS
Eurodollar Market (cont.)
f. Disadvantages:
No lender of last resort
No FDIC
Domestic Monetary Policy
Petrodollar Recycling Overexposure
Extensive Speculation Volatile FE Rate
Additional Risk
a. Sovereign or Country Risk
b. Foreign Exchange Risk

11. WORLD FINANCIAL MARKETS
Financial markets Goswami FNGB 7451
WORLD FINANCIAL MARKETS
Eurobond Market
A market for dollar denominated securities offered by a syndicate of international banks to investors in two or more nations where their distribution is legal

12. WORLD FINANCIAL MARKETS
Financial markets Goswami FNGB 7451
WORLD FINANCIAL MARKETS
Foreign Bond:
Evolution:
- Capital outflow restrictions by US (1960’s) e.g interest equalization tax: Yankee Bonds / Samurai / Bulldog / Rembrandt
- Opening of non-dollar sectors (Euro-FF or Euro- £)
- Distribution technique
- Secondary Market or Liquidity
a. Euroclear (1968: Brussels)
b. CEDEL (1971: Luxembourg)
c. Association of International Bond Dealers: A self regulatory agency

13. WORLD FINANCIAL MARKETS
Financial markets Goswami FNGB 7451
WORLD FINANCIAL MARKETS
Foreign Bond: (cont.)
Types of Instruments:
- Fixed Rate Bonds: Fixed coupon bid annually. Bullet
- Floating Rate Notes: Floating coupon, 6/3 months, base rate LIBOR floor rate
- Convertible Bonds: Bonds can be converted to equity
- Bonds with Equity Warrants
- Zero Coupon Bonds
- Zero Coupon Perpetual Bonds

14. WORLD FINANCIAL MARKETS
Financial markets Goswami FNGB 7451
WORLD FINANCIAL MARKETS
Foreign Bond: (cont.)
Operations:
- Straight Debt
- Convertible Debt
- Currency Option Bond
- FRN (Floating Rate Bond)
Participants:
- Invisible Market Bearer Form No record of ownership
- Secondary Market Free of governmental restrictions No disclosures

15. WORLD FINANCIAL MARKETS
Financial markets Goswami FNGB 7451
WORLD FINANCIAL MARKETS
Foreign Bond: (cont.)
Advantages:
- Bearer form No withheld taxes
- Flexible Rates: Fixed or Floating
- Numerous currencies are available liquid international market
Disadvantages:
- Issuing costs and distribution costs are higher
- If mismatched, FE risk is higher
- Assessment of credit risk is difficult

16. WORLD FINANCIAL MARKETS
Financial markets Goswami FNGB 7451
WORLD FINANCIAL MARKETS
Eurobond Vs. Eurocurrency Loan

17. WORLD FINANCIAL MARKETS
Financial markets Goswami FNGB 7451
WORLD FINANCIAL MARKETS
Eurocurrency - Revisited:
1. Syndicated Lending in External Markets:
- Size: (in US$ billion)
- By Origin: ( ) US$ billion US UK
Italy
France
Australia
Canada

18. WORLD FINANCIAL MARKETS
Financial markets Goswami FNGB 7451
WORLD FINANCIAL MARKETS
Eurocurrency - Revisited: (cont.)
2. Interest Rate Risk: Floating Rate Pricing
- Effects: Long term commitment of funds
Loans can be funded with short term deposits
Interest rate risk passed on to borrowers
3. Size of Funding: Syndication of Loans
Large volume of funds available to single customers
Need for cooperation among major banks

19. WORLD FINANCIAL MARKETS
Financial markets Goswami FNGB 7451
WORLD FINANCIAL MARKETS
Eurocurrency - Revisited: (cont.)
4. Syndication:
- Mandated Banks: Put the deal together
- Managing Banks: Give an underwriting commitment
Lead Manager Manager Co-Manager
- Participating Banks: Provision of funds
- Agent Banks: Manages borrowing and repayment of funds
- Reference Agent: LIBOR rates

20. WORLD FINANCIAL MARKETS
Financial markets Goswami FNGB 7451
WORLD FINANCIAL MARKETS
Eurocurrency - Revisited: (cont.)
5. Floating Rate Pricing:
Period LIBOR SPREAD Lending Rate
7/ / %
1/ / %
7/ / %
1/ / %
Non-bank & Interbank Depositors
Borrower
Rev. Credit
Banks
Principal & Interest Payment
Ref. Agent
Agent Bank

21. WORLD FINANCIAL MARKETS
Financial markets Goswami FNGB 7451
WORLD FINANCIAL MARKETS
Eurocurrency - Revisited: (cont.)
6. Cost Structure of a Syndicated Credit:
- Periodic Costs: a. Interest Rates (LIBOR) + Spread
b. Commitment Fee
c. Agency Costs
- Up-front Costs: a. Management Fees: to Mandated Bank, Underwriting fee to managing banks, participation fee
b. Out of Pocket Expenses

22. WORLD FINANCIAL MARKETS
Financial markets Goswami FNGB 7451
WORLD FINANCIAL MARKETS
Eurocurrency - Revisited: (cont.)
7. Terms of Eurocurrency Borrowing:
- Type of Credit: a. Term Credit
b. Revolving Credit
- Commitment Clause
- Maturity
- Currency
- Repayment Clauses & Prepayment Clauses