Midterm for Fin4910
Eurobonds
- A Unique characteristic is that there is an absence of regulatory environment - Less stringent disclosure - Favorable tax status (Eurobonds offer tax anonymity and flexibility. Interest paid on Eurobonds is generally not subject to income tax witholding)
What are the 3 major sources of debt financing?
- Bank loans and syndication -Euronote Market -International Bond Market
Euro Medium term notes
- Euro Medium term notes are nonunderwritten eurocurrency debt - They bridge the gap between short-term and long-term Eurocurrency debt - coupon is paid semiannually -
Euronotes and Euronote facilities
- Euronotes are short term promissory notes - These are cheaper than sydicated notes because they are sold directly to investors - Revolving underwriting facilities (rufs) -
Euronote Market
- Floating rate and short to medium term - Instruments Available: 1. Euronotes and Euronote Facilities 2. Euro Commercial Paper 3. Euro Medium-term Notes
Current Accounts
- Goods -Services -Net Income (the result inflows and outflows of dividends and income) -Net Transfers (gifts, donations, goodwill, grants, unilateral transfers
Syndicated Credits
- Loans in Large amounts by a group of banks - Many MNC's need loans that exceed a banks limit
How can you avoid transaction exposure?
- Make an immediate transaction - Make the transaction in your home currency (by doing this you would essentially be transferring the risk to the other party)
Financial Accounts
- Net Foreign Direct investment - The actual sale of stocks and bonds is reported under the financial account but the investment income generated would be recorded under the current account - Portfolio Investment: if the investment is less than 10%
Eurocredits
- These are bank loans to MNC's, sovereign government's, international Institutions and other banks - They are tied to LIBOR - The borrower pays a risk premium which will be a premium over LIBOR and this will be dependent upon the borrowers credit rating
What is the Eurocurrency market?
- This is an international financial market for deposits and loans denominated in a foreign currency - These markets are completed unregulated and are not FDIC insured - Spreads on deposits are very narrow (costs are lower because they don't have to comply with local regulation) - Even though it is unregulated the debt is virtually free of default risk because the banks that get these loans have AAA/AA credit ratings - The deposits and loans are in the millions at minimum
The international debt markets offer:
-A variety of different maturities -Repayment structures - currencies in de
International Bond Market
-Fixed or Floating rate - Medium to long term maturities -Instruments Available: 1. Eurobonds 2. Foreign Bonds
Bank loans and syndication
-Floating rate and short to medium term - Instruments available: 1. International Bank Loans 2. Eurocredits 3. Syndicated Credits
What are the determinants of exchange rates?
-The balance of payments -International Parity conditions - The economic outlook of a country
International Bank Loans
-These are bank loans in eurocurrency markets -The spread is less than 1%
EuroCurrency Markets
-This is currency that is held outside of the country - These are not FDIC insured - Even though these accounts are not FDIC insured it is virtually default free (because loans are only made to AAA/AA rated companies) - Deposits and loans are made in the millions -
ADR Advantages to investors in the US
1. Currency conversion is done at the institutional level , not at the retail level 2. dividends are received in USD by the individual investor 3. Tax-withholding is simpler and it is done by the depository bank 4. Ownership is transferred in the US 5. Settlement is done in the US and is simpler 6. ADR's provide liquidity 7. Financial statements are in english
What are the 5 accounts under the balance of payments?
1. Current Account 2. Capital Account 3. Financial Account 4. Reserves Account 5. Statistical discrepency Account
Why do companies Cross-list their shares?
1. To improve liquidity 2. To increase share price by overcoming mispricing 3. To establish a secondary market for acquisitions 4. To compensate managers in the country where they have cross-listed (ESOP)
What are the 3 foreign exchange risks?
1. Transaction exposure 2. Operating Exposure 3. Translation/Accounting exposure
Cash flow matching can be effective hedging technique when A) the exposure cash flow is relatively constant and predictable over time. B) it is part of the risk-sharing agreement. C) there are no local suppliers that can accept longer term payments in their home currency. D) all of the above
A
For the most part, U.S. SEC disclosure requirements are ________ stringent than other, non-U.S. equity market rules. A) more B) less C) as equally D) none of the above
A
In general, which has the shorter maturity and is more appropriate for funding short-term inventory needs? A) commercial paper B) Euro-Medium-Term notes (EMTNs) C) the international bond market D) all of the above
A
Level II ADRs must meet A) U.S. GAAP standards. B) home country accounting standards. C) both U.S. GAAP and home country standards. D) none of the above.
A
Of the following, which is NOT an external source of financing for the foreign subsidiary? A) borrowing from sister subsidiaries B) borrowing from commercial banks in the parent country C) selling new stock to local shareholders D) All of the above are external sources of financing for the foreign subsidiary.
A
Private placement represents A) sale of a security to qualified institutional buyers. B) taking the firm private via international private equity fund. C) placing ADRs on the public equity markets. D) None of the above
A
The three main types of foreign exchange risk are A) operating, transaction, and translation. B) translation, accounting, and operating. C) transaction, accounting, and translation. D) operating, currency, and market.
A
Who pays the costs of creating a sponsored ADR? A) the foreign firm whose stocks underlie the ADR B) the U.S. bank creating the ADR C) both the U.S. bank and the foreign firm D) the SEC since they require the regulation
A
What is EuroCurrency?
A Eurocurrency is a currency that is held outside of the home country
BOP and interest rates
A decrease in interest rates triggers an outlfow of capital which will lead to a decline in the currency value. On the other hand, a higher interest rate attracts foreign investors and will lead to a stronger value in the currency
Alibaba issued...
ADR's
Leads
Accelerating the payment
A ________ is the term used to describe a foreign currency agreement between two parties to exchange a given amount of one currency for another, and after a period of time, to give back the original amounts. A) matched flow B) currency swap C) back-to-back loan D) none of the above
B
Depositary receipts traded outside the United States are called ________ depositary receipts. A) Euro B) Global C) American D) None of the above
B
The primary method by which a firm may protect itself against operating exposure impacts is A) money market hedges. B) diversification. C) forward contract hedges. D) balance sheet hedging.
B
Which of the following is NOT a major subaccount of the Balance of Payments? A) the financial account B) the accounts payable C) the capital account D) the current account
B
________ are domestic currencies of one country on deposit in a second country. A) LIBORs B) Eurocurrencies C) Federal funds D) Discount window deposits
B
In 1957....
British authorities restricted british pound loans to nonresidents of the U.K. - This action was done to stop the weakening of the british pound by pound outflows ---to remedy this british banks started giving loans in USD which helped strengthen the british pound again
ADRs that are created at the request of a foreign firm wanting its shares traded in the United States are A) facilitated. B) unfacilitated. C) sponsored. D) unsponsored.
C
Level I ADRs trade primarily A) on the New York Stock Exchange. B) on the American Stock Exchange. C) over the counter or pink sheets. D) Level I ADRs typically do not trade at all, but instead are privately issued and held until maturity.
C
Of the following, which is NOT an internal source of financing for the foreign subsidiary? A) equity in the form of cash from the parent firm B) equity in the form of real goods from the parent C) debt in the form of loans from the same commercial bank used by the parent D) All of the above are internal sources of financing for the foreign subsidiary.
C
One of the main risks eliminated with Cross-Currency Swaps once compared to back-to-back loans is A) interest rate risk because the swap dealer locks the interest rates. B) counterparty risk because the intermediary serves as a guarantor. C) balance sheet risk since the swap is reported on the balance sheet as liability. D) all of the above
C
Operating exposure A) creates foreign exchange accounting gains and losses. B) causes exchange rates to fluctuate. C) is the possibility that future cash flows will change due to an unexpected change in foreign exchange rates. D) measures a country's propensity to import and export.
C
The particular strategy of trying to offset inflows of cash from one country with outflows of cash in the same currency is known as A) hedging. B) diversification. C) matching. D) balancing.
C
What type of international risk exposure measures the change in present value of a firm resulting from changes in future operating cash flows caused by any unexpected change in exchange rates? A) transaction exposure B) accounting exposure C) operating exposure D) translation exposure
C
Which of the following is NOT an example of diversifying operations? A) diversifying sales B) diversifying location of operations C) raising funds in more than one country D) sourcing raw materials in more than one country
C
Which of the following is NOT identified by your authors as a proactive management technique to reduce exposure to foreign exchange risk? A) matching currency cash flows B) currency swaps C) remaining a purely domestic firm D) parallel loans
C
Inflows to the country will generate a........
CREDIT
Unsponsored ADR's
Created at the request of the investors
Sponsored ADR's
Created at the request of the underlying foreign company
A ________ occurs when two business firms in separate countries arrange to borrow each other's currency for a specified period of time. A) natural hedge loan B) forward loan C) currency switch loan D) back-to-back loan
D
A ________ resembles a back-to-back loan except that it does not appear on a firm's balance sheet. A) forward loan B) currency hedge C) counterparty D) currency swap
D
By cross listing and selling its shares on a foreign stock exchange a firm typically tries to accomplish which of the following? A) improve the liquidity of its existing shares B) increase its share price C) increase the firm's visibility D) all of the above
D
Diversification as a strategic tool to manage operating exposure includes A) internationalization of suppliers' base. B) opening new markets with localized production. C) diversifying finance base across various capital markets and currencies. D) All of the above
D
Eurobanks are A) banks where Eurocurrencies are deposited. B) major world banks that conduct a Eurocurrency business in addition to normal banking activities. C) financial intermediaries that simultaneously bid for time deposits in and make loans in a currency other than that of the currency of where it is located. D) All of the above are descriptions of a Eurobank.
D
In addition to gaining liquidity, which of the following could also be considered a legitimate reason for cross-listing equity? A) enhance a firm's local image B) become more familiar with the local financial community C) get better local press coverage D) all of the above
D
Level ________ is the easiest standard to satisfy for issuing ADRs. A) 144a B) III C) II D) I
D
The term "euro" as used in the euro equity market implies A) the issuers are located in Europe. B) the investors are located in Europe. C) both A and B. D) none of the above.
D
Lags
Decelerating the Payment
What is the SEC rule 415?
Euro Medium term notes are shelf registered under the sec rule 415 which means a borrower can register them and issue them in smaller chunks - They can be offered in smaller amounts with different maturities, currencies and seniority - These are commonly used by the auto-financing industry
Where do Eurocurrency market transactions take place?
Eurobanks
Currency matching can eliminate the need for what?
Forward contracts
BOP and Exchange rates
If a country has a current account deficit than it is likely there will be a decline in the currency value
In the US Eurobanks have divisions called....
International Banking Facilities
Eurocurrency markets are also known as.....
International money market
How is equity raised in foreign capital markets?
It is raised through depository receipts
International trading in the USD centered where?
London
BOP and inflation rates
Low cost imports can help inflation rates -- on the other hand the current account will reflect a deficit
Euro Commercial Paper
Nonunderwritten facilities: This means that the borrower does not need to hire a bank as an underwriter to issue euro commercial paper -They are issued and placed outside the jurisdiction of the currency of denomination - Highly liquid secondary market -commonly used for working capital - 90% are issued in the USD - ECP's are issued at the PV of a promised amount
In 1974....
Opec nations wanted to diversify their petrodollar holdings and decided to do so in the Euro-yen and Euro-mark markets
Euronote underwriting facilities
Revolving underwriting facilities (rufs) Standby note issuance facilities (snifs) Note issuance facilities (nifs)
What is the difference between Euronote and Bank Loans and syndication?
The difference is that in the Euronote market there is a secondary market for trading which makes it very liquid
What are the External forms of financing?
The subsidiary can borrow from the sources in the parent company. For example: banks and other financial institutions The subsidiary is borrowing on its own at this point and not using the parent company as a guarantor.
Internal sources of financing from the parent company?
The subsidiary can get funds from the parent company in the form of: - Equity (Cash or Real Goods) -Debt - Leads and Lags
Internal sources of financing from the Sister subsidiary?
The subsidiary can get funds in the form of: - Debt - Leads and Lags
Internal sources of financing from Depreciation?
This can only happen when the company has already started operations and has been in business for quite some time
Eurodollar markets
This is a subsection in the eurocurrency markets - USD deposits are USD deposits made outside of the US - These markets were born shortly after the second world war - This was because eastern european holders of the USD were afraid that the US would freeze their assets -
What is the statistical Discrepency?
This is the account that after adding up all the balances it plugs in to ensure the BOP has a zero balance.
Euro-accounts
US residents can hold Euro-accounts within the US itself in all currencies except the Eurodollar
Outflows of the country will generate.....
a DEBIT
Foreign bonds are underwritten by who?
a syndicate composed from a single country and it is sold principally within that country and denominated in that country
London's expertise in innternational finance...
and its strategic location were factors that led to the success of the eurodollar market in london
ADR's
depository receipts issued in the US
GDR's
depository receipts issued outside of the home country and also outside of the US
In the 1960's.....
due to regulation Q, investors moved their money to eurocurrency markets to avoid caps. - The regulators in the US put celiengs on the amount of interest that could be offered and due to this investors moved their money to foreign markets
What are the internal sources of financing?
get funds from the: -parent company - Sister subsidiary - Borrowing using the parent as gaurantor
What is the difference between the bond market and EMTN market?
the difference is that the bond market cannot supply such small paper or precise amount of debt
ADR's and GDR's are structured.....
to resemble a typical stock listed and traded in the US or Foreign exchange
