International financial

management
Module 6
Contents
FRA
Interest rate caps and floors
Financial swaps -types-motivation
Application of swaps
GDR
ADR.

Forward Rate Agreements
Description
Definition
Forward Rate Agreement (FRA) is a forward
contract between two parties to exchange an
interest rate differential on a notional principal
amount at a given future date in which one party, the
Long, agrees to pay a fixed interest payment at a
quoted contract rate and receive a floating interest
payment at a reference rate (Underlying rate).
Forward Rate Agreements
Description
Characteristics :
An forward contract of interest rate.
One party makes a fixed interest payment.
The other party makes an interest payment based on
a referenced rate at the time of contract expiration.
The underlying is an interest rate.
Payments are based on the difference between the
contract rate and the reference rate (e.g., LIBOR,
MIBOR,).
A swap is a special combination of FRAs.
Forward Rate Agreements
Description
Initial date
Settlement date
of FRA contract
Maturity date of
underlying FRA contract
Payoff
Waiting period Validity period
Forward Rate Agreements
Description
Notation
M : notional principal
i
r
: reference rate (market rate)
i
g
: FRA contract rate (fixed rate)
N : duration (period of the reference rate)
N = d
t
-d
e
with :
d
t
: maturity date of underlying FRA contract
d
e
: settlement date of FRA contract

Forward Rate Agreements
Description
Payoff (interest rate differential)
If settlement were made on the date d
t




But if the settlement is made on the date d
e


M i
r
r
g
( )

N
360

M i
r
r
g
( )

N
360
1+ i
r

N
360
Forward Rate Agreements
Description
The buyer of a FRA receives the settlement amount
He agrees to pay a fixed rate payment and receive
the floating rate payment.
He want to protect itself from a future increase in
interest rate.
The seller of a FRA pays the settlement amount
He agrees to pay a floating rate payment and receive
a fixed rate payment.
He want to protect itself from a future decline in
interest rate

Forward Rate Agreements
Description
Example
The firm negotiates the following FRA (it sells the
FRA) :
Notional : $1000 000
Reference rate : 6-month Libor
FRA contract Rate : 4%
d
e
: in 3 months
d
t
: in 9 months
Duration : 6 months

Forward Rate Agreements
Description
Example
Hypothesis : in 3 months, if the 6-month Libor is
3.5%
Firm receives the interest rate differential.
Payoff

M = 1000000
0, 035 0, 04 ( )
180
360
1+ 0, 035
180
360
M = 2457
Forward Rate Agreements
Description
Example
Hypothesis : in 3 months, if the 6-month Libor is 5%
Firm pays the interest rate differential.
Payoff

M = 1000000
0, 05 0, 04 ( )
180
360
1+ 0, 05
180
360
M = 4878, 05
Forward Rate Agreements
Description
Convention
The preceding FRA is noted : 3vs9 FRA at 4%

3 m.: settlement date
9 m.: maturity date

Forward Rate Agreements
Example
March 10, a treasurer knows that he must to borrow 10
million Euros soon. He want to protect itself from a
possible rise of the rates by using a FRA contract.
Information
Period of the loan : June 10 to September 10
FRA rate proposed by a bank
FRAs Bid Ask
1vs 4 3.34 3.38
2vs5 3.36 3.40
3vs6 3.58 3.62
12vs18 4.39 4.43
Forward Rate Agreements
Example

Determine the settlement amount if the June 10
the market rate is 4%.
A Cap is a series of
sequentially maturing
European style call options
that protect the purchaser
from a rise in a floating rate
index, usually LIBOR, above
a predetermined level.
The purchaser has the right
to receive a periodical cash
flow equal to the difference
between the market rate and
the strike, effectively placing
a maximum limit on interest
payments on floating rate
debt.
N
o

C
a
p
Cap Rate
F
l
o
a
t
i
n
g

I
n
t
e
r
e
s
t

R
a
t
e

Reference Rate
Cap Payoff
G
a
i
n
Cap
It is a strategy where
the cost of purchasing a
cap is offset by the
simultaneous sale of
another cap with a
higher strike.
Corridor Payoff
Cap Rate
- Sell at higher rate
N
o

C
o
r
r
i
d
o
r
Cap Rate
- Buy at lower rate
F
l
o
a
t
i
n
g

I
n
t
e
r
e
s
t

R
a
t
e

Reference Rate
G
a
i
n
Corridor
In steep yield curve
environments the
implied forward rates
will be much higher
than spot rates and the
strike for caplets later
in the tenor may be
deep in the money.
5
%
Time
I
n
t
e
r
e
s
t

r
a
t
e

%
Straight Cap
Step up
cap
Forward rates
Interest rate floor is
similar to cap except that
it is structured to hedge
against decreasing
interest rates (or down-
side risk). An interest
rate floor closely
resembles a portfolio of
put option contracts.
Floor Rate
F
l
o
a
t
i
n
g

I
n
t
e
r
e
s
t

R
a
t
e

Reference Rate
Floor Payoff
N
o

F
l
o
o
r
Floor
G
a
i
n
Consider a 2-year semi-annual floor on $100 notional
amount with strike rate k = 4.5%, indexed to the 6-
month rate. At time 0, the 6-month rate is 5.54 percent
so the floor is out-of-the-money, and pays 0 at time 0.5.
The later payments of the floor depend on the path of
interest rates.
Time 2 Time 1.5 Time 1 Time 0.5 Time 0
5.54%
$0.0386
e
6.004%
$0.00
4.721%
$0.0794
d
6.915%
$0.00
5.437%
$0.00
4.275%
$0.1626
c
7.864%
$0.00
6.184%
$0.00
4.862%
$0.00
3.823%
$0.3322
b
$0.00
$0.00
$0.00
$=0.3385
a
Floor Rate = 4.5%
Caplet at Time 1.5
At Time 2, the investor gains
$ 0.3385 = $100 * (4.5% 3.823%) / 2
which is equivalent to, at Time 1.5
$ 0.3322 = $0.3385 / (1 + 3.823% / 2)
Other calculations
$ 0.1626 = [0.5*(0) + 0.5*($ 0.3322)] / (1 + 4.275% / 2)
$ 0.0794 = [0.5*(0) + 0.5*($ 0.1626)] / (1 + 4.721% / 2)
$ 0.0386 = [0.5*(0) + 0.5*($ 0.0794)] / (1 + 5.54% / 2)
Time 1.5 Time 1 Time 0.5 Time 0
5.54%
$0.0262
i
6.004%
$0.00
4.721%
$0.0538
h
6.915%
$0.00
5.437%
$0.00
4.275%
$0.1101
g
$0.00
$0.00
$=0.1125
f
Floor Rate = 4.5%
Caplet at Time 1.0
Time 0.5 Time 0
5.54%
$0.0648
6.004%
$0.00
4.721%
$0.1332
Caplet at Time 0
Because at Time 0.5 and 0, the
floorlets never get in the money,
so the value of the floor will be:

$ 0.0648 = $0.0386 + $0.0262
Consider a contract that floors the interest rate on a
$10,000 loan at 8% per annum (with quarterly
compounding) for three months starting in one year.
This is a floorlet and could be one element of a floor.
Suppose that the zero curves is flat at 9% per annum
with quarterly compounding and the one-year volatility
for the three-month rate underlying that floorlet is 20%
per annum. The continuously compounded zero rate for
all maturities is 6.9394%.

K = 8%, = 0.25, N = 10,000, l(t
i
, t
i-
) = 9%
t
i
= 1.0, t
i+1
= 1.25 and
k
= 0.20
( )
2
1
ln 0.09/ 0.08 0.2 0.5
0.6889
0.20 1
d
+
= =

2 1
0.20 0.4889 d d = =
( ) ( )
1.25
1
10, 000 0.25 0.9169 0.08 0.4889 0.09 0.6889
$6.663
t
F N N = (

=
P(0, t
i+1
) = e
-0.069394*1.25
= 0.9619

,
( ) ( ) ( ) ( )
1 2 1
Black and Scholes for Floorlet:
0, ,
i
i
t i i i
F N P t KN d l t t N d
o
o
o

+
= (

It is the combination of a Cap and a Floor.

It consist of buying a cap and selling a floor
or vice versa.

Zero Cost Collar exists when the premium
of the floor exactly matches that of the cap.
N is the notional principal amount of the agreement

r
c
is the cap rate

r
f
is the floor rate

d
t
is the term of the index in days.
{ } { } | | 360 , 0 max , 0 max
t f c
d r r r r N
- Pay-off graphs of zero-
cost Collar




P
r
o
f
i
t
r
f
Interest
Rate
+ =
r
c
r
f
r
c
a. Buy Cap b. Sell Floor c. Buy Collar

A customer is borrowing $10 million at 1 month.

LIBOR plus 200 bps, for a current rate of 7.75%
(LIBOR is currently at 5.75%), from ABC Bank. The
customer wishes to cap LIBOR so that it does not
exceed 6%.

In order to reduce the cost of the cap, the borrower
sells a floor to ABC Bank with a strike of 4%.
ABC Bank and the customer have created a band within which
the customer will pay LIBOR plus the borrowing spread of 200
bps.

If LIBOR drops below the floor, the customer compensates ABC
Bank.

If LIBOR rises above the cap, ABC Bank compensates the
borrower.

The customer has foregone the benefit of reduced interest rates
should LIBOR ever fall below 4%. In this example, the customer
never pays more than 8% or less than 6%.
Provides protection against interest rate increase and gain
from interest rate decrease.

It can be used as a form of short-term interest rate protection
in times of uncertainty.

It can be structured so that there is no up-front premium
payable (Zero-cost Collar).

It can be cancelled, however there may be a cost in doing so.
It provides you with some ability to participate in interest rate
decreases with the Floor rate as a boundary.

To provide a zero cost structure or a reasonable reduction in
premium payable under the Cap, the Floor Rate may need to
be set at a high level. This negates the potential to take
advantage of favorable market rate movements


There is more contract trade on the
international Over The Counter market
with cash flows. They are similar to the
previous ones but more complex

Knock-out cap
Bounded cap
Flexible cap
Flexible floor

These will at any time t
i
give the standard payoff C
t
t
i
unless the floating rate
( ) t t , o +
has exceeded a certain level, so the payoff is zero.
| | ti ti , o
during the period
This type is like an ordinary cap except that the cap
owner will only receive the scheduled payoff if the
payments received so far due to the contract does not
exceed a certain pre-specified level.
This cap is an Interest Rate Cap where the buyer is
only entitled to utilize the cap for a limited and pre-
defined number of reset periods.
This cap is the same as the Flexible cap except that
here it is the floor that can only be used during a
certain number of reset periods.
Introduction
Definition (Derivative Securities, Jarrow and Turnbull)
A financial swap is a contract between two
individuals, called counterparties, to exchange
a series of cash payment.

The swap contract specifies:
The interest rate to each cash payment.
The currency to each cash payment.
Time table for payments
Provision to cover the counterparty risk
Introduction
Some elements about swap
First Swap : in 1981
In 2001 :
The whole size of the swap market is close to 48,000
milliard US dollars.

As of May 16 2014
Currency Daily Weekly YTD Notional Outstanding
USD $58,836,812,710 $395,999,859,884 $8,961,352,632,154 $2,935,586,259,946
EUR 127,550,612,000 1,182,391,858,000 18,778,684,025,819 4,717,935,622,099
GBP 194,571,443,491 794,936,554,874 3,277,987,999,021 1,533,293,270,091
JPY 510,372,028,500 2,115,190,609,500 91,311,977,390,750 41,547,355,393,000
CHF CHF593,339,000 CHF1,750,388,000 CHF42,485,623,000 CHF31,372,542,400
AUD $8,921,910,000 $29,720,687,000 $549,806,596,248 $1,111,970,817,169
CAD $7,297,607,500 $64,190,855,500 $1,018,300,308,072 $211,979,162,747
Other*
Show All
$14,016,503,241 $78,501,199,588 $894,816,008,065 $875,251,581,397
Total in USD $595,515,303,660 $3,542,342,353,548 $43,488,930,470,615 $14,531,001,086,656
Different Kind of swap
Plain vanilla interest rate swap
Characteristics :
Two counterparties : A and B
A agrees to make fixed payments to B.
The size of each payment : prespecified fixed rate on a
notional principal.
B agrees to make floating rate payments to A.
The size of each payment : floating rate on the same
notional principal for the same period.
Payments are made in the same currencies.
Payments are netted

Different Kind of swap
Plain vanilla interest rate swap

Counterparty A

Counterparty B

Fixed rate
Floating rate
Taux Annuel Montaire (TAM)

Fr. A French floating benchmark rate
calculated by annualizing the latest twelve
monthly overnight average rates. TAM is
widely used as a benchmark floating rate
and as an alternative to PIBOR.
Monthly OverNight Average
(MONA) Swap

A swap with a floating rate determined by
the average overnight lending rate over a
period (a month in this specific version)
rather than by a fixed-term LIBOR rate on
a reset date.
Different Kind of swap
Plain vanilla interest rate swap
Example
Consider the following swap, counterparty A pays a
fixed rate 6 percent per annum on an annual basis,
and received from counterparty B TAM + 30 pdb.
The current TAM is 5,5 percent.
The notional is 35 million euros.
Maturity : 5 years
Counterparty A

Counterparty B

6%
TAM + 30 pdb
Different Kind of swap
Plain vanilla interest rate swap
Example
Each year the counterparty A has to pay :


The first year the counterparty B has to pay :


The first year A pays B the net difference : 70 000



35 000 000
6
100
|
\

|
.
|
= 2100000


35 000 000
5, 5 + 0, 3
100
|
\

|
.
|
= 2030000
Different Kind of swap
Plain vanilla interest rate swap
Example of using interest swap
A firm A has borrowed 4 millions which the
floating rate is TAM + 100 pdb. Today this borrow
has maturity of 5 years. The firm A anticipates an
increase of the interest rate and it wants to hedge
this risk.
Firm A negotiates with a bank the following swap :
Notional : 4 millions
Duration : 5 years
Pay a fixed rate : 4%
Receive a floating rate : TAM
Basis of payments : Year
Different Kind of swap
Plain vanilla interest rate swap
Example of using interest swap

Bank
Pays
TAM + 1%
Pays 4%
Receives TAM
Firm A
Different Kind of swap
Plain vanilla interest rate swap
Example of using interest swap
Based on 4 millions, every year the firm :
Pays the interests of the borrow : TAM + 1%
Pays the fixed rate of the swap : 4%
Receives the floating rate of the swap : TAM
Finally the whole rate is :
TAM+1% + 4% -TAM=5%
The firm A has exchanged a floating rate TAM + 1% against
a fixed rate of 5%.


Different Kind of swap
Pricing Schedules
The following table shows an example of pricing schedule for swap with
various maturities.





All rates are quoted against TAM.
If the bank negotiates a seven-year swap to receive TAM and pays fixed for
seven years:
The fixed rate is 55 pdb above the Treasury Note : 7,05%
Bid/Ask spread (benefit of the bank) : 2 pdb.


Maturity Bank pays fixed rate Bank receives fixed rate Current Treasury Note rate
2 2 yr TN + 30 pdb 2 yr TN + 32 pdb 5%
3 3 yr TN + 33 pdb 3 yr TN + 35 pdb 5,20%
4 4 yr TN + 37 pdb 4 yr TN + 39 pdb 5,50%
5 5 yr TN + 42 pdb 5 yr TN + 44 pdb 6%
6 6 yr TN + 48 pdb 6 yr TN + 50 pdb 6,20%
7 7 yr TN + 55 pdb 7 yr TN + 57 pdb 6,50%
Different Kind of swap
Currency Swap

Definition :
A currency swap is an agreement between two
parties to exchange a given amount of one currency
for another, or a stream of one currency for a stream
of another.



Different Kind of swap
Currency Swap
Differences with interest swap :
The principal amounts are exchanged at the origination date of the
contract.
4 possibilities :
Fixed rate in the first money/fixed rate in the second money.
Fixed rate in the first money/floating rate in the second money.
Floating rate in the first money/fixed rate in the second money.
Floating rate in the first money/floating rate in the second money.
The principal amounts are exchanged at the maturity date of the
contract.
Different Kind of swap
Currency Swap




Counterparty A

Counterparty B

First currency
principal
Second currency
principal
Counterparty A

Counterparty B

First currency
Fixed/floating coupon rate
Second currency
Fixed/floating coupon rate
Counterparty A

Counterparty B

Second currency
principal
First currency
principal
Different Kind of swap
Currency Swap : Example
A firm has issued bonds with face value of 10
millions with a coupon of 6 % and for a
maturity of 7 years. The firm prefers to have
dollars. So, it negotiates a currency swap with a
bank. This swap specifies that :

bank pays a fixed rate of 6% in .
firm pays a fixed rate of 6% in $.

Different Kind of swap
Currency Swap : Example
cash Flows :




date Amount paidAmount received
0 10 000 000 $15 000 000
1 $900 000 600 000
2 $900 000 600 000
3 $900 000 600 000
4 $900 000 600 000
5 $900 000 600 000
6 $900 000 600 000
7 $900 000 600 000
7 $15 000 000 10 000 000
Different Kind of swap
Commodity Swap

One counterparty : payments at a fixed price
per unit for a notional quantity of some
commodity.
Other counterparty : payments a floating price
per unit for a notional quantity of some
commodity.
Floating price : usually defined as an average price.

Different Kind of swap
Commodity Swap : example
Suppose that an airline company has a constant demand for 20 000
barrels of oil per month. This company wishes to limit its exposure to the
volatile oil prices in the spot market and it negotiates the following
commodity swap :

Notional principal : 20 000 barrels.
Company agrees to pay each month $65 per barrel.
The swap dealer agrees to pay each month the average daily price for
oil during the preceding month.




Different Kind of swap
Commodity Swap : example





Swap dealer
Spot oil market

$65 per barrels

Average spot price

Airline Company
Different Kind of swap
Equity Swap

One counterparty : payments at a fixed price for
a notional principle for a fixed period of time.
Other counterparty : payments a floating rate
based on the some total (dividend and gain in
capital) index return.
Dow Jones, SP 500, CAC 40
Notional principles are not exchanged.


Different Kind of swap
Equity Swap : Example
Consider a portfolio of an equity fund the return
of which is highly correlated with the CAC 40
index. In the goal to limit the risk exposure the
fund manager negotiates the following equity
swap :
He agrees to pay the CAC 40 return.
The swap dealer agrees to pay a fixed rate of 6% .
The payments are annual.
Notional principle is fixed at 50 millions.
Maturity : 2 years

Different Kind of swap
Equity Swap : Example




Swap dealer
Stock Market

CAC 40 index return

6%

Fund Manager
Evaluation
Plain vanilla interest rate swap

Idea : A swap is equivalent to an asset and a liability.

Method : Interest rate swap can be priced as the
difference between :
The value of a fixed rate bond.
The value of a floating rate bond.



Evaluation
Plain vanilla interest rate swap
Example
Consider the following swap, counterparty A pays a fixed rate 6
percent per year on an annual basis, and received from counterparty B
TAM .
The current TAM is 5,5 percent.
The notional is 35 million euros.
Maturity : 5 years





Counterparty A

Counterparty B

6%
TAM + 30 pdb
Evaluation
Plain vanilla interest rate swap
Example : Yield Curve






Maturity Fixed rate TAM
1 5% 5,50%
2 5,10% 5,60%
3 5,30% 5,90%
4 5,50% 6%
5 5,80% 6,20%
Evaluation
Plain vanilla interest rate swap
Example : Evaluation of the fixed rate side





We find :


V
F
(0) =
C1
1+ r(1)
( )
1
+
C2
1+ r(2)
( )
2
+
C3
1+ r(3)
( )
3
+
C4
1+ r(4)
( )
4
+
C5
1+ r(5)
( )
5
With C(i) = fixed rate notional
Value of fixed rate side 8979022,937
Evaluation
Plain vanilla interest rate swap
Example : Evaluation of the floating rate side
Simple case : Floating rate and reference rate are
perfectly correlated.


Bond Value =
N.V F(0, 0,1)
1+ r(1) ( )
1
+
N.V F(0,1, 2)
1+ r(2) ( )
2
+
N.V F(0, 2, 3)
1+ r(3) ( )
3
+... +
N.V F(0, n 1, n) + N.V
1+ r(n) ( )
n
With N.V = Nominal value of the bond
Evaluation
Plain vanilla interest rate swap
Example : Evaluation of the floating rate side
Application
Suppose a Bond with following characteristics :
Maturity : 5 years
Floating rate : TAM
Nominal value : 35 000 000
Yield curve and forward rates
Maturity Fixed rate TAM Forward rate
1 5% 5,50%
2 5,10% 5,60% 5,70%
3 5,30% 5,90% 6,50%
4 5,50% 6,10% 6,70%
5 5,80% 6,20% 6,60%
Evaluation
Plain vanilla interest rate swap
Example : Evaluation of the floating rate side
In the floating size of a swap there is no principle
payment :






We find :



Floating size of a swap=
N.V
0
r
1
1+ r(1)
( )
1
+
N.V
1
r
1
1+ r(2)
( )
2
+
N.V
2
r
1
1+ r(3)
( )
3
+
N.V
3
r
1
1+ r(4)
( )
4
+
N.V
3
r
1
1+ r(5)
( )
5
Floating size of a swap= NV-
N.V
1+ r(5)
( )
5
Value of the floating rate side 9091309,64
Evaluation
Plain vanilla interest rate swap
Example : Evaluation of the floating rate side
Value of an interest rate swap








We find :



Value of a swap= Value of a fixed size - Value of the floating size
with :
Value of the fixed size :
C(i)
(1+ r(i ))
i
i=1
N

Value of the floating size :

N.V
i1
r
i
(1+ r(i ))
i
i=1
N

= N.V- N.V
1
(1+ r( N))
N
Value of swap -112286,71
Evaluation
Plain vanilla interest rate swap
Problem
If the evaluation date is not the origination date ?
Solution
To evaluate the fixed size.
To evaluate the floating size
Take account of the payments at this date.





Evaluation
Plain vanilla interest rate swap : Application
Let the following interest swap :
Maturity 3 years
Floating rate : one-year Euribor
Settlement is yearly
The fixed rate : 7,35%
The yield curve used for two size of swap is the
following



Maturity Fixed rate Euribor
1 5% 5,00%
2 6% 6,00%
3 6,00% 7,50%
Evaluation
Plain vanilla interest rate swap : Application


Questions

Determine the swap value at the origination date.
Determine the swap value 3 month after the
origination date if the yield curve flattens at 7%.



Evaluation
Plain vanilla interest rate swap : Application
Solution (1)
Forward rates




Value of swap




Maturity Euribor Forward rate
1 5,00%
2 6,00% 7,01%
3 7,50% 10,56%
Value of fixed rate side 19,77482699
Value of the floating rate side 19,50394305
Value of swap 0,270883937
Evaluation
Plain vanilla interest rate swap : Application
Solution (2)
Method :
Evaluate the present value in 3 month of the floating size
Evaluate the present value in 3 month of the fixed size.
Solution


Value of floating size at t=1 12,6561
Value of floating size in 3 month 16,7825
value of the fixed side in 3 month 19,6178
Value of the swap in 3 month 2,8352
Evaluation
Par Swaps

Definition
A par Swap is a swap which the present value of the
fixed payments equals the present value of the
floating payments.
Consequence :
The net value of a par Swap is zero.
Evaluation
Par Swaps
The par swap rate is the rate R which checks
the following equation.



N R
(1+ r(i))
i
= N.V- N.V
1
(1+ r( N))
N
i=1
N

Value of the
fixed size
Value of the
floating size
Evaluation
Par Swaps

Determine the par rate swap in the case of the
two previously examples (using the solveur).


First example : R= 7,25%
Second example : R=6,29%
Depository receipts
Depository receipts are instruments issued
by international depositories (ODB), and
they represent an interest in the underlying
shares held by them in the issuer company
(Indian Company).
The shares are usually held by a domestic
custodian on behalf of the depositories in
turn issue the depository receipts, which
entitle the holder of the receipts to get the
underlying shares on demand.
DRs are traded on Stock Exchanges in the
US, Singapore, Luxembourg, London, etc.
DRs listed and traded in US markets are
known as American Depository Receipts
(ADRs) and those listed and traded
elsewhere are known as Global Depository
Receipts (GDRs).
In Indian context, DRs are treated as FDI
INTERNATIONAL CAPITAL MARKET
INTERNATIONAL EQUITY MARKET INTERNATIONAL BOND MARKET
EURO BOND
FOREIGN
BOND
ADR GDR
AMERICAN DEPOSITORY
RECEIPTS
ADR is a dollar-denominated negotiable certificate. It
represents a non-US companys publicly traded equity. It
was devised in the late 1920s to help Americans invest in
overseas securities and to assist non-US companies
wishing to have their stock traded in the American
Markets.
ADR were introduced as a result of of the complexities
involved in buying shares in foreign countries and the
difficulties associated with trading at different prices and
currency values.
Process to issue adr/gdr
Issuing
Company
(RIL)
Foreign
Depository
(Morgan
Stanley)
Clearing
Agency
(Euro Clear)
Foreign Stock
Exchange
(NYSE)
GDR/ADR
Holders
(Bank Of
America)
Domestic
Custodian bank
(SBI)
Share certificate
confirmation
Issue of DR
Payment
Dividend
ADVANTAGES OF ADR/GDR
Can be listed on any of the overseas stock
exchanges /OTC/Book entry transfer
system.
Freely transferable by non-resident.
They can be redeemed by ODB.
The ODB should request DCB to get the
corresponding underlying shares released
in favor of non resident of investors.
(Shareholders of issuing companies).
Types of adr
SPONSORED ADR UNSPONSORED ADR
Issued with cooperation of
the company whose stock
will underlie the ADR
Issued by broker/dealer
or depository bank without
the involvement of
company whose stock
underlies the ADR
Comply with regulatory
reporting.
No regulatory reporting
Listing on international
Stock Exchanges allowed.
Trade on OTC market
Levels of adr
Level 1- Level 1 depositary receipts are the lowest
level of sponsored ADRs that can be issued. When a
company issues sponsored ADRs, it has one
designated depositary who also acts as its transfer
agent.
Level 1 shares can only be traded on the OTC market
and the company has minimal reporting requirements
with the U.S. Securities and Exchange Commission
[SEC].
Level 2- Level 2 depositary receipt programs are more
complicated for a foreign company. When a foreign
company wants to set up a Level 2 program, it must
file a registration statement with the U.S. SEC and is
under SEC regulation.


The advantage that the company has by upgrading their
program to Level 2 is that the shares can be listed on a U.S.
stock exchange. These exchanges include the New York
Stock Exchange (NYSE), NASDAQ, and the American Stock
Exchange (AMEX).

Level 3- A Level 3 American Depositary Receipt program is
the highest level a foreign company can sponsor. Because of
this distinction, the company is required to adhere to stricter
rules that are similar to those followed by U.S. companies.

Foreign companies with Level 3 programs will often issue
materials that are more informative and are more
accommodating to their U.S. shareholders because they rely
on them for capital
GLOBAL DEPOSITORY
RECEIPTS
A bank certificate issued in more than one country for
shares in a foreign company. The shares are held by a
foreign branch of an international bank. The shares trade
as domestic shares, but are offered for sale globally
through the various bank branches.
A financial instrument used by private markets to raise
capital denominated in either U.S. dollars or Euros.
The voting rights of the shares are exercised by the
Depository as per the understanding between the issuing
company and the GDR holders.
Types of gdr
Rule 144A GDRs
Rule 144A GDRs are privately placed depositary receipts
which are issued and traded in accordance with Rule
144A. This rule was introduced by the SEC in April 1990 in
part to stimulate capital raising in the US by non-US
issuers.
Non-US companies now have ready access to the US equity
private placement market and may thus raise capital
through the issue of Rule 144A GDRs without complying
with the stringent SEC registration and reporting
requirements.
Regulation S
With the global integration of the major
securities markets, it is now commonplace
to have fungible securities listed and
cleared in more than one market.
Just as ADRs allow non-US issuers to access
the important US market, GDRs allow
issuers to tap the European markets.
DIFFERNCE BETWEEN ADR &
GDR
ADR GDR
American depository receipt (ADR) is
compulsory for non us companies to trade
in stock market of USA.
Global depository receipt (GDR) is
compulsory for foreign company to access
in any other countrys share market for
dealing in stock.

ADRs can get from level 1 to level III. GDRs are already equal to high preference
receipt of level II and level III.
ADRs up to level I need to accept only
general condition of SEC of USA.
GDRs can only be issued under rule 144 A
after accepting strict rules of SEC of USA .
ADR is only negotiable in USA . GDR is negotiable instrument all over the
world
Investors of USA can buy ADRs from New
york stock exchange (NYSE) or NASDAQ
Investors of UK can buy GDRs from London
stock exchange and luxemberg stock
exchange and invest in Indian companies
without any extra responsibilities .

WHICH INDIAN COMPANIES HAVE
ADR & GDR
COMPANY ADR GDR
Bajaj Auto No YES
Dr Reddys YES YES
HDFC Bank YES YES
ICICI bank YES YES
ITC NO YES
L&T NO YES
MTNL YES YES
HINDALCO NO YES
INFOSYS
TECHNOLOGIES
YES YES
TATA MOTORS YES NO
COMPANIES ADR GDR
PATNI COMPUTERS YES NO
SBI NO YES
WIPRO YES YES
VSNL YES YES