Page 73 - DMGT549_INTERNATIONAL_FINANCIAL_MANAGEMENT

International Financial Management

Notes ECBs may be raised from any internationally recognised source such as banks, export
credit agencies, foreign collaborator etc. There are two kinds of risks involved in ECBs –
interest rate risk and exchange rate risk.

Companies must manage the exposure arising due to adverse changes of exchange rates
or the interest rates to safeguard their position.

4.7 Keywords

Bunny Bonds: These bonds permit investors to reinvest their interest income into more such
bonds with the same terms and conditions, thus compounding their earnings.
Deep Discount Convertibles: These are also known as Zero Coupon Convertible Bonds. They are
issued at a discount to the par value and mature at par value. Thus, they have no or very low
interest payments.
Euro Bonds: Euro bonds are unsecured debt securities issued and sold in markets outside the
home country of the issuer (borrower) and denominated in a currency different from that of the
home country of the issuer.
Euro Equity: If a company raises funds using equity route through instruments like Global
Depository Receipts (GDRs) or Superstock Equity in more than one foreign market except the
domestic market of the issuing company and denominated in a currency other than that of the
issuer’s home country, it is known as ‘Euro Equity Issue’ or ‘Global Equity Issue’.
Foreign Bonds: These are the bonds floated in a particular domestic capital market (and in the
domestic currency of that market) by non-resident entities. The bonds are generally named on
the basis of the capital markets in which they are floated.
Foreign Currency Convertible Bonds (FCCBs): The instrument floated by the Indian companies
are commonly referred to as Foreign Currency Bonds (FCCBs).
Foreign Equity: If the equity issue is made in a particular domestic market (and in the domestic
currency of that market), it is known as a ‘Foreign Equity Issue’.

LIBOR: The base interest rate paid on deposits among banks in the Eurocurrency market is
called LIBOR.

4.8 Review Questions

1. What is meant by Eurocurrency markets? What are the reasons for the existence of the
Eurodollar market? Can the Eurocurrency create money?
2. What are the problems created by the existence of the Eurocurrency market? What are
some of the important benefits that result from this market?
3. What are the necessary conditions for the existence of a Euromarket?

4. Briefly describe the characteristics of the Eurodollar market.
5. List the major advantages of Euro issues to Indian companies.
6. Has the performance of Indian Euro issues been satisfactory? Why or why not?
7. Explain the characteristics of GDRs and how they are priced.
8. Give similarities and differences between domestic issues and Euro issues.
9. What are foreign currency convertible bonds? Are they more beneficial to the issuer than
a GDR?
10. What is the International Bond Market? Enumerate the important features of this market.

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