INTERNATIONAL

FINANCIAL MARKET
INSTRUMENTS

Presented By,
Neenu T. Hari
Shiji Prem
FINANCIAL MARKET
• In economics, a financial market is a
mechanism that allows people to buy and sell
financial securities , commodities and other
items of value at low transaction costs.

• Financial markets can be domestic or they

can be international.
2 Types of international Financial
Market Instruments:

 Money market instruments.

 Capital market instruments.

Money Market
The money market is a component of the
financial markets for assets involved in short-
term borrowing and lending with original
maturities of one year or shorter time frames.
Common money market
instruments
 Bankers’ acceptance and Letters of credit.
 Repurchase agreements.
 Euro notes and Euro commercial papers.
 Eurodollars.
 Federal funds.
 Municipal notes.
 Treasury bills.
 Certificate of deposits.
 Floating rate notes.
 Euro bonds.
Banker’s Acceptance And
Letters Of Credit
 A bankers' acceptance, or BA, is a time draft drawn
on and accepted by a bank
 Before acceptance, the draft is not an obligation of
the bank; it is merely an order by the drawer to the
bank to pay a specified sum of money on a specified
date to a named person or to the bearer of the draft.
 Upon acceptance, which occurs when an authorized
bank accepts and signs it, the draft becomes a
primary and unconditional liability of the bank
A bankers acceptance is also a money market
instrument – a short-term discount instrument that
usually arises in the course of international trade

 Bankers' acceptances are considered very safe assets,

as they allow traders to substitute the bank's credit
standing for their own. They are used widely in
international trade where the creditworthiness of one
trader is unknown to the trading partner. Acceptances
sell at a discount from face value of the payment
order, just as US Treasury bills are issued and trade at
a discount from par value.
 In typical export transactions, the exporter
will want to be paid once the goods arrive
in foreign port. So, the exporter asks for
acceptance of importers bank of time draft
and that essentially would be an invoice
that requests a money market
instruments.
Repurchase Agreement
 Repurchase agreements (RPs or repos) are
financial instruments used in the money markets and
capital markets. A more accurate and descriptive
term is Sale and Repurchase Agreement

 Cash receiver (seller) sells securities now, in return

for cash, to the cash provider (buyer), and agrees to
repurchase those securities from the buyer for a
greater sum of cash at some later date, that greater
sum being all of the cash lent and some extra cash
(constituting interest, known as the repo rate).
 A reverse repo is simply a repurchase agreement as
described from the buyer's viewpoint, not the seller's.
Hence, the seller executing the transaction would
describe it as a 'repo', while the buyer in the same
transaction would describe it a 'reverse repo'. So
'repo' and 'reverse repo' are exactly the same kind of
transaction, just described from opposite viewpoints.
 A repo is economically similar to a secured loan, with
the buyer receiving securities as collateral to protect
against default. However, the legal title to the
securities clearly passes from the seller to the buyer,
or "investor".
 Although the underlying nature of the transaction is that of a
loan, the terminology differs from that used when talking of
loans due to the fact that the seller does actually repurchase the
legal ownership of the securities from the buyer at the end of
the agreement. So, although the actual effect of the whole
transaction is identical to a cash loan, in using the 'repurchase'
terminology, the emphasis is placed upon the current legal
ownership of the collateral securities by the respective parties.

 Although repos are typically short-term, it is not unusual to see

repos with a maturity as long as two years.
Euro notes and Euro commercial
papers

 Both Euro notes and Euro commercial papers are

short-term instruments, unsecured promissory notes
issued by corporations and banks. Euro notes, the
more general term, encompasses note- issuance
facilities, those that are underwritten, as well as those
are not underwritten. The term Euro commercial
papers is generally taken to mean notes that are
issued without being backed by underwriting facility-
that is without the support of medium term group of
banks to provide funds in events that ate borrower is
unable to role over its Euro notes on acceptable terms.
 Commercial paper is a money market security
issued by large banks and corporations. It is
generally not used to finance long-term
investments but rather to purchase inventory or to
manage working capital

 Because commercial paper maturities do not

exceed nine months and proceeds typically are
used only for current transactions, the notes are
exempt from registration as securities with the
United States Securities and Exchange
Commission.
Eurodollars
 U.S. dollars held as deposits in foreign banks

 Dollar denominated deposits are referred to as

Eurodollars

 The Eurodollar market is relatively free of

regulation, banks in the Eurodollar market can
operate on narrower margins than banks in the
United States.
Federal funds
 Short-term funds transferred (loaned or borrowed) between
financial institutions, usually for a period of one day.
 Used by banks to meet short-term needs to meet reserve
requirements (over night).
 Banks loan because they would not make any interest at all on
excess reserves held with the Fed.
 Banks may borrow the funds to meet the reserves required to
back their deposits.
 Participants in federal funds market include commercial banks ,
savings and loan associations , government sponsored enterprises
, branches of foreign banks in the US , federal agencies and
securities firms.
Municipal notes
 Bond issues by a state , city , or other local govt. or
their agencies.
 The method and practices of issuing debt are governed
by an extensive system of laws and regulations , which
vary by state.
 The issuer of the municipal bond receive a cash
payment at the time of issuance in exchange for a
promise too repay the investor over time.
 Repayment period can be as short as few months to 20
, 30 , 40 years or even longer.
 Bond bear interest at either fixed or variable rate of
interest
 Interest income received by bond holders
is often exempt from the federal income
tax and income tax of state
 Municipal bond holders may purchase
bonds either directly from the issuer at the
time of issuance or from other bond
holders after issuance.
 Treasury bills.
 Treasury Bills are short term (up to one year)
borrowing instruments of the union
government. It is an IOU of the Government. It
is a promise by the Government to pay a
stated sum after expiry of the stated period
from the date of issue (14/91/182/364 days i.e.
less than one year). They are issued at a
discount to the face value, and on maturity the
face value is paid to the holder. The rate of
discount and the corresponding issue price are
determined at each auction.
Certificate of
deposits
 A certificate of deposit is a promissory note
issued by a bank or a credit union

 The insurer are FDIC or NCUA

 Usually a fixed interest rate is paid by the

institution
Rates
General rules for interest rates
 The larger the principal, the higher the
interest

 The longer the term, higher the interest

 The smaller the bank the higher the interest

Working
 A passbook is received by the purchaser

 No certificate as such

 At maturity the investors are informed

 Callback option
Floating rate notes
 The interest rate is floating and set above or
below the LIBOR

 Interest rates are revised every 3-6 months

Eurobond
 The Eurobonds are the international bonds
which is issued in a currency other than the
currency of the country or market it is issued

 Generally issued by international sydicate of

banks and financial institutions
INTERNATIONAL CAPITAL MARKET

Capital Market
A market where savers (on who have excess money) can
transfer their funds to borrowers (one who is having
shortage of money) in exchange of a promise to receive
and amount higher than what they have transferred.
 Stock Market Primary and Secondary
 Bond Market Markets

The international capital market includes any transaction

with an international dimension. It is not really a single
market but a number of closely integrated markets that
include some type of international component.
INTERNATIONAL CAPITAL MARKET Cont’d.
...

 Any Capital Market can develop into International Capital Market,

provided:
Local Regulations permit it

Potential users are attracted to it.

 Some important Int. Capital Markets are:

London

New York

Tokyo

Singapore

Hong-kong
 International Capital
Market
INSTRUMENTS

International Capital Market

INTERNATIONAL BOND INTERNATIONAL EQUITY

MARKET MARKET

EURO BOND FOREIGN BOND GDR ADR

INTERNATIONAL EQUITIES
They are the instruments on the preference list of investors
as well as issuers.

International equities or Euro-equities do not represent debt,

nor do they represent FDI. They represent Foreign Portfolio
Equity Investment. In this case, investor gets the dividend.

Euro-equities are ordinary shares sold to international

investors in the form of American/Global Depositoey
Receipt(ADRs/GDRs).
INTERNATIONAL EQUITIES Cont’d. ...
GDR – GLOBAL DEPOSITORY RECEIPT
 is a negotiable instrument denominated in some freely
convertible currency which is used as a funding vehicle for
raising capital simultaneously in many markets (countries)
 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.
INTERNATIONAL EQUITIES Cont’d. ...

ADR – AMERICAN DEPOSITORY RECIEPT

 is a negotiable instrument denominated in US dollar ($)
which is used as a funding vehicle for raising capital From
United States of America.
 represents ownership in the shares of a non-U.S. company
that trades in U.S. financial markets.
 ADRs help to reduce administration and duty costs that
would otherwise be levied on each transaction.
BENEFITS TO ISSUER & INVESTOR
Benefits to Issuer
 Maintain the share prices.
 Gain international recognition among public.
 Bring in foreign exchange.
 International capital is available at lower cost.
 Funds raised through such an instrument do not add to the
foreign exchange exposure.
 The presence of restrictions on the issue of shares in the
domestic market facilitates the issue of euro-equities.
Benefits to Investor
International equities bring in diversification benefits and
raise return with a given risk or lower the risk with a given
return.
PROCEDURE OF ISSUE
 Planning for the size and the government
approval.
 Role of custodian bank.
 Launching of ADRs/GDRs.
 Voting rights.
 The cost of issue.
 Domestic
Issuing Company Share Certificates
Custodian Bank
(RIL)
(SBI)
Dividend

Payment

tion
in Rs.

i rm a
in Rs.

Co n f

Foreign Issue of Depository Receipt

GDR / ADR
Depository Holders
(Morgan Stanley) (Bank of America)
$
n t in
Dividend

Payment

m e
Pay
in $

in $

i dend
D iv $ Foreign Stock
Clearing Agency in
(Euro Clear / Exchange
Cedel) (NYSE, LSE)

Flow of Shares Flow of Payment Flow of Dividend

DOCUMENTATION
1. The prospectus containing detailed information about the issue
and the issuer.
2. The depository agreement – The agreement between issuing
company and the depository
3. The underwriting agreement concluded between the issuing
company and the underwriter.
4. A copy of the agreement concluded between the custodian and
the depoditiry.
5. A copy of trust deed is enclosed which provides for the duties
and responsibilities of the trustee regarding servicing of the issue.
6. A copy of the agreement with the listing stock exchange annexed
so that the investors are well aware of the secondary market.
7. Subscription agreement.
INTERNATIONAL BONDS
 International bonds are a debt instrument.
They are issued by international agencies,
governments and companies for borrowing
foreign currency for a specific period of time.
 The issuer pays interest to the creditor and
makes repayment of capital.
International Capital Market - Euro
Bonds
Bond issued outside the country of the
currency in which it is denominated

 Bearer Bonds
 Interest Coupon attached
 Listed on one or more stock exchanges
 Generally traded in OTC Market
 Free from regulations of Govt. - where issue is made
 Terms are decided keeping whole world in mind
International Capital Market-
Foreign Bonds

Bond issued in a foreign country denominated in

currency of that particular country

 Yankee Bonds – US Market

 Samurai Bonds – Japanese Market
 Bulldog Bonds – US Market etc.
Foreign Bonds Euro Bonds
1.Denominated in the 1.Denominated in the
currency of issuer’s currency of investors
country country

2. Underwritten by the 2. Underwritten by the

underwriters of issuer’s underwriters of
country multinationality

3. Maturity of foreign 3. Euro bonds are tailored

bond is determined to the needs of
according to the investors multinational investors
of a particular country

4. Subjected to 4. Free from the rules &

governmental regulations regulations of issuer’s
in the issuer’s country country
 Cont’d. …
 Global Bonds
o They are normally large in size
o They carry high ratings
o They are offered for simultaneous placement in different
countries
o They are traded on home market basis in different region

 Straight Bonds – carry fixed interest rate

Bullet-redemptionbond – repayment at the end of
maturity
Rising-coupon bond – coupon rate rises over time
Zero-coupon bond – no interest payment; issued at
discount
Bonds with currency options – currency option to
investor
Bull and Bear bond – indexed to some specific
benchmark
 Cont’d. …
 Floating-Rate notes – do not carry fixed interest
rate
oInterest rate is quoted as a premium or
discount to a reference rate which is
invariably LIBOR
Perpetual FRNs – the principle amount is never paid
o Interest rate is revised periodically
Minimax FRNs – minimum and maximum rates are
mentioned
Drop Lock FRNs – investor has the right to convert FRN to
Straight bond

Flip-flop FRNs–investor has the option to convert FRN to a

three-month note with a flat three-month yield(then to
perpetual)
Mismatch FRNs- interest paid six-monthly (fixed)
Hybrid fixed rate reverse FRNs- high fixed rate for cuople
INTERNATIONAL BONDS
Cont’d. …

 Convertible Bonds
 Convertible in other instruments after a time
 Command a high market value because of its
convertibility prevelege

 Cocktail Bonds
 Bonds denominated in mixture of currencies like SDR,
EURO
 Invsetors purchasing the cocktail bonds get
automatically the currency diversification benefits
PROCEDURE OF ISSUE
 Stage I: Preparation for the Issue
 Decision about size of issue
 Decision about Lead Manager

 Decision about FEATURES/TERMS OF THE ISSUES

 Price
 Time
 Maturity etc.

 Preparation of PROSPECTUS and Other Legal Documents

 Approval from Authorities (like SEC, SEBI)

PROCEDURE OF ISSUE
Cont’d. …
 Stage II: International Credit Rating

 Credit Rating is a rating by an rating by globally accepted

Financial Agencies like AAA+

 It helps investors in choosing their investment avenues

 Become important in international context, as company is not

known to all investors

 Lead manager helps company to get a good credit rating

PROCEDURE OF ISSUE
Cont’d. …
 Stage III: Selling of Bonds

 Lead Manger with other selling group sell bonds

 To Individuals

 To Institutions such as investment trust, banks and

companies
PROCEDURE OF ISSUE
Cont’d. …

 Stage IV: Listing on Exchange

 Arrangement is made to enlist the bonds on stock exchange

 In case of Foreign Bond, Listing is on one stock exchange

 In case of Euro Bond, listing is on many stock exchanges

simultaneously…