INTERNATIONAL MONEY MARKET INSTRUMENTS.

COMMERCIAL PAPER
It is a corporate unsecured short term promissory note issued on a discount. Purchased at a price below its F.V. and redeemed on maturity at its F.V. CP given for a period of 270 days. New issues are made to pay off the old ones. They are negotiable but not active in the secondary market. They are generally given to high credit borrowers. They need to have a backup credit of nearly 50% of the issue. Investors are generally pension funds, Insurance companies, Money market instruments etc.

Certificate of deposit
Negotiable instrument can be sold in the secondary mkt. Final holder gets F.V and interest on maturity. Denominations are large generally $100000. Interest are paid on maturity if less than a year or paid semi annually if maturity is more than a year. Euro CD are issued by London banks. Interest are paid on an annual basis for CD maturing after a year. Floating rate CD are also issued for a period ranging from 18 mths to 5 yrs.

Bankers Acceptance
It arises from international trade transactions. Obligation by a specific bank to pay a certain amt on a particular date, in the future. It can be sold in the secondary mkt.

Medium term notes.

Off shoot of CP. Fixed rate corporate bonds with shorter maturity. Designed according to particular investor requirements. In secondary mkt as MTN is designed to suit individual investor needs it becomes unique, therefore it lacks liquidity.

Floating rate notes

Interest rate floats with prevailing interest rates. It can be a capital or a money market instrument. FRNs are held by financial institutions whose cost of fund changes with short term interest rate. Interest rate are set every 3-6 months according to LIBOR , U.S. treasury bills.

Eurocurrency
Any freely convertible currency deposited in a bank Outside the country of its origin is Eurocurrency. U.S.$ is the dominant Eurocurrency.

Features of Eurocurrency market

Largest money market free from govt rules, regulations and interference. Deposits in this market being for a short term pose as a risk for Euro currency loans as they are generally for a long term. Transactions are of wholesale nature, made up of large denominations. 80% of these transactions are inter-bank. This market is for time and savings deposit rather than demand deposits. It is mainly a Eurodollar market. Loans are generally made at a certain percentage above LIBOR. These loans mature anytime between one to five years. Interest rates on these loans are lesser than the domestic loans.

Significance of Eurocurrency market

Single largest international market for financial intermediation. It is an important outlet for flow of funds. It serves 2 purposes: a)major source for short term loans for working capital needs.(b) Euro currency deposits are effective money market device to hold corporate liquidity. Easy access, movement of foreign currencies at favorable interest rates. U.S $ , GBP, Ffr, Yen are widely used Eurocurrencies. Base interest rate for deposits in banks in Eurocurrency market is LIBOR. It is determined thru market forces for each currency. Euro currency market can exist if: (A) domestic govt. allows foreign currency deposits (B) foreign entities to be allowed to use or exchange the currencies (C) market to be conducive to encourage foreign entities to invest in this market than domestic market.

International Bonds
Foreign bonds. Euro bonds: they are unsecured debt securities issued and sold in the market outside the home country and denominated in currency different from that of the home country. They are underwritten and sold in more than one country thru international syndicates. It may offer currency options.

Features
Offshore operation. Not subject to time consuming registration. They are issued in a bearer form. Offers investors exemption from tax with holding provisions applicable to domestic and foreign bonds.

External Commercial Borrowings

ECBs include commercial bank loan, buyers credit, suppliers credit, FRNs and fixed rate bonds, Credit from official sector and various forms of euro bonds. It is better to borrow thru \ECBs than domestic borrowings : a) Low inters rates b) timely availability of funds c) They have less end use conditions. Risks involved in ECBs a) Prime borrowers are only allowed. b) They can support only traditional source of finance. c) Exposure to currency risk and interest risk as hedging options are limited.

FCCBs
Foreign currency bonds are equity linked debt securities convertible into equity or depository receipt after a specific period. Bearer document. Holder had the option of converting into equity or retaining the bond. 50% of FCCB's are in U.S.$, 10% in Swiss franc which has a niche market and balance in GBP,Yen,Ffr.

Pure Euro Debt

Raised thru syndicate loans or pvt. Placements Under syndicate loans a lead managers appointed and they form a syndicate of various financial institutions who combine to raise the money. Not traded in the capital market. Floating rate of interest. No listing is required. Loans could be secured and unsecured. Interest rates vary according to the size or the loan.

Euro issues
Advantages to the holder of GDRs a) It is bought and sold in international stock exchanges, (b) dividend is paid in U.S$. (c) Listed in stock exchange therefore many investors are interested (d) Being bearer instrument it need not have the name of the holder. Advantages to the issuer (a) Helps in placing equity in the international market. (b) Raise funds at low interest rate of 3-5% compared to 814% in the domestic market.

Euro debt
Easy accessibility of funds from the international market. Low cost of funds. Companies are exempted from paying withholding taxes. Longer terms of debt.

Euro convertibles
These bonds are treated as debts before conversion and equity afterwards. Advantages: International recognition. International listing/trading therefore it leads to high liquidity and quick settlement. Diversify risk.

IFM

COUNTRY RISK ASSESSMENT

Political factors
Continuous problems and difficult to identify. Stability of local political govt. Consensus regarding priorities Attitude of host govt. Wars. Mechanism for expression of discontent

Financial factors
Inflation rate. Current and potential state of countrys economy. Adjustment to external shocks.