International Bonds

International bonds are a debt instrument. They are issued by international agencies, governments and companies for borrowing foreign currency for a specified period of time. The issuer pays interest to the creditor and makes repayment of capital. There are different types of such bonds. The procedure of issue is very specific. All these need some explanation here.

Types of International Bonds 1. Foreign Bonds and Euro Bonds

International bonds are classified as foreign bonds and Euro bonds. There is a difference between the two, primarily on four counts. First, in the case of foreign bond, the issuer selects a foreign financial market where the bonds are issued in the currency of that very country. If an Indian company issues bond in New York and the bond is denominated in a currency other than the currency of the country where the bonds are issued. If the Indian company’s bond is denominated in US dollar, the bonds will be used in any country other than the USA. Then only it will be called Euro bond. Secondly, foreign bonds are underwritten normally by the underwriters of the country where they are issued. But the Euro bonds are underwritten by the underwriters of multi-nationality. Thirdly, the maturity of a foreign bond is determined keeping in mind the investors of a particular country where it is issued. On the other hand, the Euro bonds are tailored to the needs of the multinational investors. In the beginning, the Euro bond market was dominated by individuals who had generally a choice for shorter maturity, but now the institutional investors dominate the scenes who do not seek Euro bond maturity necessarily to march their liabilities.… Read the rest

International Money Market

A money market is a market for instruments and a means of lending (or investing) and borrowing funds for relatively short periods, typically regards as from one day to one year. Such means and instruments include short term bank loans. Treasury bills, bank certificates of deposit, commercial paper, banker’s acceptances and repurchase agreements and other short term asset backed claims.

As a key elements of the financial system of a country, the money market plays a crucial economic role that if reconciling the cash needs of so called deficit units (such as farmers needing to borrow in anticipation of their later harvest revenues), with the investment needs of surplus units (such as insurance companies wanting to invest cash productively prior to making long term investment choices). Holding or borrowing liquid claims is more productive than holding cash balances. A smoothly functioning money market can perform these functions very efficiently if borrowing lending spreads (or bid offers spreads for traded instruments) are small (operational efficiency), and if funds are lent to those who can make the most productive use of them (allocation efficiency). Both borrowers and lenders prefer to meet their short term needs without bearing the liquidity risk or interest rate risk that characterizes longer term instruments, and money market instruments allow this. In addition money market investors tend not to want to spend much time analyzing credit risk, so money market instruments are generally characterized by a high degree of safety of principal. Thus the money market sets a market interest rate that balances cash management needs, and sets different rates for different uses that balance their risks and potential for productive use. … Read the rest

The Development of the Eurodollar Market

Euro Markets are unregulated Money and Capital markets. These markets are spread over Europe, Middle East and Asia. Short-term Euro markets are called as “Euro- currency Markets”. Any currency held outside to home country is referred to as Euro-currency. For example when a Dollar is held as a deposit outside the U.S. is referred to as Euro-Dollar, Similarly a deposit in Marks, outside Germany is called as a Euro-Mark deposit.

The Dollar was and still is widely used to settle the international payments. Although there is an increase in European Deposits, denominated in Euro, Pound sterling, Yen etc., by far the U.S. Dollar still remains the most popular Euro-currency. The preference for Dollars can be attributed to the relative political stability and the absence of severe restrictions in the U.S. It thus facilitates high liquidity to Dollar–denominated deposits.

There are many reasons which have helped to popularize Euro Dollar deposits. Some of these are discussed in detail here.

Americans could prefer to hold their Dollars outside the U.S. This may be attributed sometimes to the numerous financial services provided by foreign banks as compared to American Banks. Further, at regulations and restrictions are capital outflow by the U.S. Similarly, at times the U.S. may lay restrictions and the Americans restraining them from depositing in foreign securities. In such cases it would be advantageous for the Americans to have Dollar Deposits outside the U.S. as they can use their Euro Dollar deposit whenever they require it, without fear of any restrictions being laid.… Read the rest

Gold Backed Currency System

If the monetary authority holds sufficient gold to convert all circulating money, then this is known as a 100% reserve gold standard, or a full gold standard. Some believe there is no other form of gold standard, since on any “partial” gold standard the value of circulating representative paper in a free economy will always reflect the faith that the market has in that note being redeemable for gold. Others, such as some modern advocates of supply-side economics contest that so long as gold is the accepted unit of account then it is a true gold standard. In an internal gold-standard system, gold coins circulate as legal tender or paper money is freely convertible into gold at a fixed price.

In an international gold-standard system, which may exist in the absence of any internal gold standard, gold or a currency that is convertible into gold at a fixed price is used as a means of making international payments. Under such a system, when exchange rates rise above or fall below the fixed mint rate by more than the cost of shipping gold from one country to another, large inflows or outflows occur until the rates return to the official level. International gold standards often limit which entities have the right to redeem currency for gold. Under the Bretton Woods system, these were called “SDRs” for Special Drawing Rights.

Effects of Gold Backed Currency

The commitment to maintain gold convertibility tightly restrains credit creation. Credit creation by banking entities under a gold standard threatens the convertibility of the notes they have issued, and consequently leads to undesirable gold outflows from that bank.… Read the rest

The Benefits of a Single Currency System – Euro

The euro is the result of the most significant monetary reform in Europe since the Roman Empire. Although the euro can be seen simply as a mechanism for perfecting the Single European Market, facilitating free trade among the members of the Euro-zone, it is also regarded by its founders as a key part of the project of European political integration.

The euro is administered by the European System of Central Banks (ESCB), composed of the European Central Bank (ECB) and the Euro-zone central banks operating in member states. The ECB (headquartered in Frankfurt am Main, Germany) has sole authority to set monetary policy; the other members of the ESCB participate in the printing, minting and distribution of notes and coins, and the operation of the Euro-zone payment system.

The introduction of a single currency for many separate countries presents a number of advantages and disadvantages for the participating nations.

1. Removal of Exchange Rate Risk

One of the most important benefits of the euro will be lowered exchange rate risks, which will make it easier to invest across borders. The risks of changes in the value of respective currencies have always made it risky for companies or individuals to invest or even import/export outside their own currency zone. Profits could be quickly eliminated as a result of exchange rate fluctuations. As a result, most investors and importers/exporters have to either accept the risk or “hedge” their bets, resulting in further costs on the financial markets. Consequently, it is less appealing to invest outside one’s own currency zone.… Read the rest

International Equity Investments – Euro Equities

International equities or the Euro equities do not represent debt, nor do they represent foreign direct investment. They are comparatively a new financial instruments representing foreign portfolio equity investment. In this case, the investor gets the dividend and not the interest as in case of debt instruments. On the other hand, it does not have the same pattern of voting right that it does have in the case of foreign direct investment. In fact, international equities are a compromise between the debt and the foreign direct investment. They are the instruments that are presently on the preference list of the investors as well as the issuers.

Benefits to Issuer/ Investor

The issuers issue international equities under certain conditions and with certain objectives. First, when the domestic capital market is already flooded with its shares, the issuing company does not like toad further stress to the domestic stock of shares since such additions will cause a fall in the share prices. In order to maintain the share prices, the company issues international equities. Secondly, the presence of restriction on the issue of shares in the domestic market facilitates the issue of Euro equities. Thirdly the co company issues international equities also for the sake of gaining international recognition among the public. Fourthly, international equities bring in foreign exchange which is vital for a firm in a developing country. Fifthly, international capital is available at lower cost though the Euro equities. Sixthly, funds raised through such an instrument do not add to the foreign exchange exposure.… Read the rest