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EURO CURRENCY MARKET INSTRUMENTS.

Commercial Paper An unsecured, short-term loan issued by a bank or corporation in the international money market, denominated in a currency that differs from the corporation's domestic currency. It is a promissory note with maturity less than a year, generally the period varies between 90 days to 180 days.

Generally issue is not underwritten. Amount: USD 100,000 or equivalent. Issued on Discount to Yield basis, but interest rate works out lesser than that is paid on bank borrowing and higher than that is paid by the bank on deposits. They are unsecured instrument
For example, if a U.S. corporation issues a shortterm bond denominated in Canadian dollars to finance its inventory through the international money market, it has issued euro commercial paper.

Whatever the instrument used, the issuers aims are similar: to widen the investor base beyond its domestic market, and/or to avoid the regulatory restrictions of its domestic market.

Certificate of Deposit
A certificate of deposit (CD) is a money market instrument issued by a depository institution as evidence of a time deposit. Small denomination certificates of deposit are issued to retail investors. Euro CDs are issued outside a country but are denominated in that country's currency.

For example, euro CDs can be used to fund international lending or to tap a wider investor pool on behalf of a Eurobanks domestic lending operations. As well as widening the deposit market internationally, Euro CDs allow banks to substitute from domestic CDs when borrowing costs are lower in the Euro market and vice-versa.

Arbitrage opportunities may also arise between the domestic and Euro interbank and CD markets, which helps to create liquidity in the secondary market. In addition to euro money market securities - as in the bond market (foreign bonds) - banks (CDs) and
corporates (CP) can issue money market securities in a foreign country denominated in that countrys currency. For example, a non-US bank issuing Dollar denominated CDs in the US is issuing a Yankee CD

1. EURO-NOTE MARKET
Market of short- to mediumterm debt instruments sourced in the Eurocurrency markets
I. Euro-note facilities: short-term, negotiable promissory notes, provided by international investment and commercial banks (fees for underwriting and placement services). The euro-note is substantially cheaper source of ST funds than syndicated loans, because the notes are placed directly with the investor public, and the securitized form allows the ready establishment of liquid secondary markets.

II- Note-issuance facility (NIF):


A medium-term legally-binding commitment under which a borrower can issue a short-term paper in its own name, underwritten by banks which are committed either to purchase any note the borrower is unable to sell, or to provide credit.

Issuing procedures with arranger or placing agent and tender panel. Borrowers place short term notes of 3 months to 6 months maturity directly with the investors and the notes are rolled over on maturity

The banks underwrite at the time of issue as well as when the notes are rolled over with slight variation they are also known as: 1. Revolving underwriting facility (RUF) 2. Standby Note Issuance Facility (SNIF)

III- Euro medium-term notes (EMTNs)


It bridges the gap between the ST euro commercial paper issued in domestic markets < 6 months, and the longer-term international bond.
Market expansion when the SEC instituted Rule # 415, allowing companies to obtain shelf registrations for debt issues: once the registration was obtained, the corporation could issue notes on a continuous basis without having to obtain new registrations for each additional issue. This allows a firm to sell S/MT notes through a cheaper and more flexible issuance facility than ordinary bonds. Maturity: from 1 year to < 10 years Small denominations (from $2 to $5 million)

1. EMTN represents Long Term, Non Underwritten and fixed interest rate source of raising finance. 2. It can be comparable with Euro-bonds with a difference that Eurobonds issue is underwritten, where as MYN issue is not underwritten 3. Their maturity is somewhere between short term CPs(less than one year) and long term Euro bonds(more than five years) 4. They are privately placed and have great flexibility

2: THE EURO-BOND MARKET


A Eurobond is underwritten by an international syndicate of investment banks and other securities firms and is sold exclusively in countries other than the country in whose currency the issue is denominated: $-denominated bond issued by a US company, but sold to investors in Europe and Japan. Eurobonds offer tax anonymity and flexibility. To receive interest, the bearer cuts an interest coupon from the bond and turns it in at a banking institution listed on the issue as paying agent.

Eurobonds are offered simultaneously in a number of different capital markets. 1. Straight fixed- rate issue: bearer bonds, fixed coupon, set maturity date, full principal repayment upon final maturity. Coupons are normally paid annually.

2. Equity- linked bonds: Convertible bonds or bonds with equity warrants (amounted to $64 billion in 1997, and $32 billion in 1988) Right to acquire equity stock in the issuing company (sometimes with detachable warrants containing the acquisition rights). The market value of an ELB is composed of the naked value and the conversion value.

The conversion to stock prior to maturity is at a specified price per share, or a specified number of shares per bond. The borrower is able to issue debt with lower coupon payments due to the added value of the equity conversion feature.

3- FRNs: Since the early 1980s. Medium-term notes where the interest is fixed as a percentage above sixmonth LIBOR. Pays a semi-annual coupon determined on variable-rate base. Negotiable and transferable securities with flexible interest rate, fixed interest periods, and issued in pre-determined and uniform amounts. FRNs are directed at institutional investors.

FRN is similar to straight bonds with respect to maturity and denomination Rate of interest however varies and is based on LIBOR + 1/8%, %,1.5%........ Rate of interest is adjusted every six months Minimum interest rate clause may be included drop lock clause may also be included, which means if minimum interest rate happens to be paid then it is locked for the remaining period of the bond. Generally it is found that banks issue and invest in FRNs

ADR

An American Depositary Receipt (ADR) is how the stock of most foreign companies trades in United States stock markets. Each ADR is issued by a U.S. depositary bank and represents one or more shares of a foreign stock or a fraction of a share. if investors own an ADR they have the right to obtain the foreign stock it represents, but U.S. investors usually find it more convenient to own the ADR.

. The largest depositary bank is The Bank of New York. ADRs do not eliminate the currency and economic risks for the underlying shares in another country
For example, dividend payments in euros would be converted to U.S. dollars, net of conversion expenses and foreign taxes and in accordance with the deposit agreement.

GDR
A Global Depository Receipt or global depositary receipt (GDR) is a certificate issued by a depository bank, which purchases shares of foreign companies and deposits it on the account. GDRs represent ownership of an underlying number of shares Global depository receipts facilitate trade of shares, and are commonly used to invest in companies from developing or emerging markets

Prices of global depositary receipt are often close to values of related shares, but they are traded and settled independently of the underlying share.
1. 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. 2. A financial instrument used by private markets to raise capital denominated in either U.S. dollars or Euros.

INTERNATIONAL BOND
An international bond is a type of long-term debt security. An international bond essentially works like a loan, with the investor being the lender and the issuing entity being the borrower. International bonds can provide bondholders with the ability to earn fixed interest payments for a set period of time. The investor then earns interest payments at periodic intervals until the bond reaches its maturity date. Once the bond matures, the initial principal is paid back to the investor in full.

A Eurobond is a type of international bond that is issued using currency that differs from the domestic market countrys currency. Eurobonds are named according to the currency in which they are denominated in. For example, a Euroyen bond is denominated in Japanese yen.

MONEY MARKET INSTRUMENTS OF INDIA:


Call/ Notice/ Term Money Repo/ Reverse Repo Inter Corporate Deposits Commercial Paper Certificate of Deposit T-bills Inter Bank Participation Certificate

Certificate Of Deposit (June,1989)


Short term borrowings in the form of Usance Promissory Notes having a maturity of not less than 15 days upto a maximum of 1 year. Subject to payment of Stamp Duty under Indian Stamp Act, 1899 (Central Act) They are like bank term deposit accounts, freely negotiable instruments often referred to as Negotiable CD.

Features Of CD
Can be issued by all scheduled commercial banks except RRBs Minimum period 15 days, Maximum period 1 year NRIs can subscribe to CDs on non-repatriable basis. Minimum amount Rs.1 lac & in multiples of Rs.1 lac Transferable by endorsement & delivery. CRR & SLR are to be maintained. CDs are to be stamped.

Advantages
Enable high return on short term surpluses. Enhances liquidity & allows resale. For raising resources in times of need. To improve lending capacity of the bank.

Commercial Paper
CP is an unsecured money market instrument (short-term) issued in the form of a promissory note. Who Can Issue CP? Highly rated corporate borrowers, primary dealers (PDs) & satellite dealers (SDs) & all-India financial institutions (FIs)

Features
Cheaper source of funds than limits set by banks. Optimal combination of liquidity return. Highly liquid instrument. Transferable by endorsement & delivery. Backed by liquidity & earnings of issuer. Issued for a minimum period of 30 days and a maximum up to one year Issued at a discount to face value Issued in demat form. (Compulsory demat from July '01).

Types of CP
Direct Papers :Issued directly by company to investors without any intermediary.

Dealer Papers :Issued by a dealer or merchant banker on behalf of a client.

Eligibility for issue of CP


The tangible net worth-not less than Rs.4 crore; the working capital (fund-based) limit-not less than Rs.4 crore & borrowal account- classified as a Standard Asset by the financing banks.

Meaning of Euro-Deposit
The equivalent of a money market rate on cash deposits made in the euro currency. Euro deposit rates will usually be quoted as "money market euro deposit rates" and are typically only offered to U.S. investors with minimum investments of greater than 10,000 euros. Euro deposits pay a floating interest rate (like a money market account) and offer the chance for capital appreciation if the euro appreciates against the investor's home currency (presumably the dollar). Euro deposit rates are based on the euro interbank offer rate, which is set by the European Central Bank.

Types of Euro-Deposit
There are two distinct types of euro deposit. The older of the two refers to a deposit of foreign currency into a bank account outside the currency's home country; the deposit of U.S. dollars into a bank account in London is one example. Since the 1999 introduction of the euro-currency, a euro deposit may also refer to a deposit of euros into a bank, typically in a European Monetary System (EMS) member country, but not necessarily so; a growing number of banks around the world offer deposit accounts in a range of currencies, the euro prominent among them. Both types are usually made for fixed terms, though this can range from one day typically made only by corporations, large investment firms, and other banks to one year or more. Interest rates on both types of euro deposits may be fixed for the term of the deposit, or floating, meaning the rate will be reset periodically over the deposit's term.

Meaning of Repos
Repo is the generic term for repurchase agreements (also known as classic repos) and buy/sell-backs. These are financial instruments typically used by securities dealers and other leveraged traders to fund the purchase and holding of securities and other assets. Repo is therefore part of the wider market in securities financing (along with securities lending and borrowing).

How do Repos Work?


A typical repo trade starts with a dealer buying an asset (eg. a bond) in an outright purchase from the so-called cash market. The dealer then has to borrow money to pay for this purchase, which he does by going into the repo market and selling the very asset that he has just bought outright. The proceeds from the repo sale are used to pay for the asset. However, as part of the repo transaction, the dealer not only sells the asset but simultaneously commits to buy it back from the repo counterparty at an agreed price at a future date. This is what differentiates a repo from normal (cash) trading (ie buying and selling outright). The fixed repurchase price means that, although the asset has been sold, a fall (rise) in value during the term of repo will be a loss (profit) to the seller, as he will have to buy it back at the price fixed at the start of the repo. In the international market, this is regulated by the ICMA Global Master Repurchase Agreement (GMRA).