INTERNATIONAL FINANCE AND INTERNATIONAL FINANCIAL MARKETS

CHAPTER9 INTERNATIONAL FINANCING AND INTERNATIONAL FINANCIAL MARKETS INTERNATIONAL FINANCING AND INTERNATIONAL FINANCIAL MARKETS CHAPTER OVERVIEW: I CORPORATE SOURCES AND USES OF FUNDS II NATIONAL CAPITAL MARKETS AS INTERNATIONAL FINANCIAL CENTERS III THE EUROMARKETS IV INTEREST RATE AND CURRENCY SWAPS V DEVELOPMENT BANKS I CORPORATE SOURCES AND USES OF FUNDS I CORPORATE SOURCES AND USES OF FUNDS A General Sources of Funds: Internally-generated cash Short-term external funds Long-term external funds CORPORATE SOURCES AND USES OF FUNDS B Forms of Securities Equity Debt: the most preferred form CORPORATE SOURCES AND USES OF FUNDS C Debt Instruments Used Commercial Bank Loans Bonds a Publicly issued b Privately issued CORPORATE SOURCES AND USES OF FUNDS D Financial Markets v Financial Intermediaries Securitization a Definition: replacing bank loans with securities issued in public markets CORPORATE SOURCES AND USES OF FUNDS b Reflects reduction in access costs due to 1.) Technological improvements 2.) Globalization CORPORATE SOURCES AND USES OF FUNDS E Globalization of Financial Markets -has led to Global center competition Regulatory arbitrage II NATIONAL CAPITAL MARKETS AS INTERNATIONAL CENTERS II.NATIONAL CAPITAL MARKET AS INTERNATIONAL CENTERS A Principal Functions of Financial Centers -between savers and borrowers To transfer purchasing power To allocate funds NATIONAL CAPITAL MARKETS AS INTERNATIONAL CENTERS B International Financial Market Development of most important: a London b New York c Tokyo THE EUROMARKETS Currency Denomination a Most often US$ b “Cocktails” allow a basket of currencies Eurobond Secondary Market -result of rising investor demand Retirement a sinking fund usually b some carry call provisions THE EUROMARKETS a b Ratings According to relative risk Rating Agencies Moody’s, Standard & Poor Rationale For Market Existence a Eurobonds avoid government regulation b May fade as market deregulate THE EUROMARKETS E Eurobond vs Eurocurrency Loans Five Differences a Eurocurrency loans use variable rates b Loans have shorter maturities c Bonds have greater volume d Loans have greater flexibility e Loans obtained faster THE EUROMARKETS F Note Issuance Facility (NIF) Low-cost substitute for loan Allows borrowers to issue own notes Placed/distributed by banks THE EUROMARKETS G NIFs vs Eurobonds Differences: a Notes draw down credit as needed b Notes let owners determine timing c Notes must be held to maturity IV INTEREST RATE AND CURRENCY SWAPS IV INTEREST RATE AND CURRENCY SWAPS A INTEREST RATE SWAPS Definition an agreement between parties to exchange US$ interest payments for a specific maturity on an agreed notional amount INTEREST RATE AND CURRENCY SWAPS a Notional principal: a reference amount used only to calculate interest expense but never repaid b Maturities: less than to over 15 years INTEREST RATE AND CURRENCY SWAPS Types of Interest Rate Swaps a Coupon swap b Basis swap Usage: to reduce risk potential and costs INTEREST RATE AND CURRENCY SWAPS B Currency Swaps Definition two parties exchange foreign-currencydenominated debt at periodic intervals Purpose: similar to parallel loan INTEREST RATE AND CURRENCY SWAPS Differences of a Currency Swap: a Currency swap is not a loan b No interest expense; no balance sheet entry c The right to offset any non-payment is more firmly establish INTEREST RATE AND CURRENCY SWAPS Similarities between Interest Rate and Currency Swaps a Avoid exchange rate risk b Exchange rate is only a reference to determine amounts exchanged INTEREST RATE AND CURRENCY SWAPS Economic Benefits of Swaps when arbitrage prohibited, they provide long-term financing V DEVELOPMENT BANKS V DEVELOPMENT BANKS A General Purpose founded by governments to help finance very large infrastructure projects DEVELOPMENT BANKS B Types of Development Banks World Bank Group includes a International Bank for Reconstruction and Development b International Development Association c International Finance Corporation DEVELOPMENT BANKS B Types of Development Banks (con’t) Regional Development Banks finance industry, agricultural, and infrastructure projects National Development Banks concentrate on a particular industry or region .. .INTERNATIONAL FINANCING AND INTERNATIONAL FINANCIAL MARKETS CHAPTER OVERVIEW: I CORPORATE SOURCES AND USES OF FUNDS II NATIONAL CAPITAL MARKETS AS INTERNATIONAL FINANCIAL CENTERS... demand 3.) build base of global owners NATIONAL CAPITAL MARKETS AS INTERNATIONAL CENTERS D Downside of Global Financial Markets -abrupt shifts in capital flows II THE EUROMARKETS II.THE EUROMARKETS... SOURCES AND USES OF FUNDS D Financial Markets v Financial Intermediaries Securitization a Definition: replacing bank loans with securities issued in public markets CORPORATE SOURCES AND USES