Page 72 - DMGT549_INTERNATIONAL_FINANCIAL_MANAGEMENT

Unit 4: Eurocurrency Markets

Notes

Case Study Euro Currency Market
K equivalent for 5 years. The following alternatives are available:
elly Finance Company wants to borrow $200 million or the foreign currency

(a) Borrow in Euros: Borrow in Euros at 8.5% p.a. with bonds sold at par. Expenses of
the issue will be 2.0% of the amount borrowed. The current exchange rate is $1.4500/
E and the Euro is expected to depreciate against the dollar by 1.5% per year.
(b) Borrow in U.S. Dollars: Borrow in Dollars at 6% p.a. with bonds sold at par. Expenses
of the issue will be 2.5% of the amount borrowed.

(c) Borrow in Yen: Borrow in Yen at 5% p.a.. The bonds will be sold at par and expenses
would be 3.5% of the face value of the issue. The current exchange rate is ¥130,00/$,
and the yen is expected to appreciate against the dollar by 2% p.a.
Question
Evaluate the cost of each alternative. Give recommendation as to which source of debt
capital is likely to be least expensive for the five year period.
Source: International Financial Management, Madhu Vij, Excel Books.

4.6 Summary

The Euro Currency market plays a key role in the capital investment decisions of many
firms since it is a funding source for corporate borrowing. The market is totally a creation
of the regulations placed by national governments on banking.

The currencies, which have become popular as Eurocurrency and tend to be widely used
include the US dollar, the British pound, the French franc, The German mark and a few
other currencies.

Domestic issues are different from Euro issues. Some of the important points of distinction
are—first, underwriting and pricing of the issue is done in advance for domestic issues
while it is done on the day of the issue for Euro issues. Second, the risk factors are
highlighted’ and mentioned in the prospectus while there is no such requirement in Euro
issues. Also the registration is done by SEBI for domestic issues while it is done by the
Ministry of Finance for Euro issues.
The Eurobond market has become popular and has flourished in the last few years due to
several unique features that sets it apart from the domestic and foreign bond market.
More and more Indian corporates are finding the route of raising money through ECBs
very attractive.
The existence of lower cost of funds in these markets inspite of the currency differential
and the costs associated with hedging the exposure as compared to the high costs prevailing
in the domestic market have made these markets the darling of eligible Indian companies.
Companies which meet the RBI guidelines raise funds in these markets more as a matter
of rule rather than exception.

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