...AUGUST 26, 2011 ------------------------------------------------- Questions and Answers on the Eurobond - Full analysis |More Services | Eurobonds are essential to save the euro, yet a flawed structure will produce adverse effects. We must see what needs to be done, what to be avoided. | In explaining the new order of things in the systemic crisis of the euro I concluded saying that a series of structural reforms in the architecture of the euro need to take place. Among them was/is the introduction of the eurobond. The eurobond is quite a vague and broad concept since it has never taken material form before. It therefore creates a number of questions as to its form, the body responsible for its issuance, the relations between it and the states, the sovereign debt of euro countries and whether it will be mutualized, what are the dangers etc. All these arguments are legitimate and bear a certain truth in them, yet without putting everything into context we can never reach a verdict and decide whether to adopt or reject the option of the Eurobond. In my discussions with my readers and with other Europeans, as well as in my research across the Internet and the European blogosphere, I have gathered a number of common questions that are raised. I shall attempt to provide answers to these questions in order decide whether eurobonds are the only way out of this dead-end that Europe has reached. (To view a concrete proposal for saving the euro, within the current institutional...
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...Eurobonds De redding van Europa? Inhoudsopgave Bronnen & Verwijzingen blz 2 Inleiding blz 3 Wat zijn de Eurobonds? blz 3 Huidig Beleid blz 3 Voordelen van de Eurobonds blz 4 Nadelen van de Eurobonds blz 5 Onze visie op de hoofdvraag blz 6 Bronnen & verwijzingen -- -- -- Inleiding In dit essay zullen we de voor- en nadelen bespreken van het lenen in eurobonds in plaats van het huidige beleid, waarin iedereen voor zich leent en of individuele staten voor andere staten lenen, en of dit de euro crisis kan oplossen. De hoofdvraag die wij zullen beantwoorden is: kan het lenen in eurobonds de euro crisis vroeg tijdig oplossen? Eurobonds Bij het overstappen naar eurobond leningen zullen er geen leningen aan individuele EU lidstaten worden verstrekt maar zullen de leningen worden verstrekt, in de vorm van een eurobond lening, aan de Europese Monetaire Unie. Dit zal betekenen dat staten niet maar individueel gerant zullen staan maar dat voor elke lening de EMU gerant zal staan. Dus mocht een EU lidstaat niet in staat zijn om haar lening terug te betalen dan zal de EMU ervoor zorgen dat de kapitaal bezitter zijn geld terug krijgt van de EMU. De huidige situatie In het huidige beleid staat elke staat gerant voor zijn eigen leningen en elke staat leent dan ook tegen een andere rente, die veelal gebaseerd is op het vertrouwen dat kapitaal bezitter heeft in de lenen partij en of...
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...unlike a share, a bond is a debt contract not a proportion of capital. Usually, the international bond market is divided in three entities: the domestic bonds, the foreign bonds and the Eurobonds. The Eurobonds segment of the international market is, according to David. L. Scott and almost all dictionaries “a type of foreign bond issued and traded in countries other than the one in which the bond is denominated.” This paper is going to focused on this particular bond issued by a particular issuer: The Eurobonds issued by Government. Why do governments issue such an instrument and why investors are more willing to buy it? It would remind, first the history of Eurobonds and why do the Governments are issuing those bonds , and then try to understand why do investors are interested in this type of bond, to reach the idea that there may have some boundaries to it. I The best way to introduce the subject might be by retracing it History in a Governmental point of view: After a slow start, the Eurobond market has grown to become a major force in the international securities markets, in part due to their tax-free status and ease of trading. Eurobonds is a market for big issuers; large institutional clients, big life insurance, and Governments Claes, A, (2002, p.378), Anatomy of the Eurobond Market 1980–2000. According to these figures, Governments are the number three using such a bond, that’s why it could be interesting to know, why they use it and what are the other...
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...[pic] UNIVERSITY OF NEW YORK IN TIRANA and Institut Universitair Kurt Bosch, Switzerland Course: Financial Markets Instructor: Prof. Dr. Aagim Kukeli, PhD E-mail: akukeli@unyt.edu.al Course Description The course is designed to develop analytical skills necessary for understanding the forces that shape financial markets and determine prices of financial instruments and assets. The course covers study of financial assets that are generally traded in major financial markets across the globe. However special focus would be given to those markets which are functional in Albanian economy so as to give a better understanding of markets in Albania and how they can be developed further. Course Objectives Upon completion of this course, you should be able to: 1. Develop in depth understanding of financial market instruments. 2. Develop Strategies for trading in financial markets. 3. Understand the business cycle forces that influence financial asset prices. 4. Understand forces that trigger business cycles. 5. Predict business cycle conditions that will prevail in the near future. 6. Learn what kind of relevant financial indicators to look for when you design the profit maximizing or loss minimizing strategies of your firm’s domestic or international operations in the immediate future. 7. Use the derivative markets to reduce risks of capital losses or to speculate for profit. 8. Understand issues relating to Bank Management. Course Contents ...
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...industrial corporations, and financial services companies. Investors may invest in corporate bonds when they see an opportunity to make a profit and/or to diversify their portfolio. A risk-averse investor would love corporate bonds because of their predictable returns, dependable income, flexibility and diversification. There are many different types of corporate bonds for the investor to invest in. They have the option to invest in Eurobonds, Rule 144A bonds, Yankee Bonds, and many other options. Although there are many different types of corporate bonds, Eurobonds are one of the most popular ways for a company to issue debt. A Eurobond is a U.S. denominated bond that is issued by an oversees company and held in a foreign institution outside both the U.S and issuers home nation. Many have named the decade of the 1950s the beginning of the Eurobond era. In this decade Europe started to become a major center of international finance, where they even began to surpass the United States. A Belgium petroleum company named Petrofina sold the very first Eurobond in 1957. These types of bonds are an important source of capital for multinational...
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...being able to get funds out of Russia and back to Canada. The yearly cash flows that could be repatriated would be $3m less interest and principal. You might make an adjustment for economic/political risk and anticipated exchange rate changes. The net present value of these cash flows in Canadian dollars could then be calculated. (ii) Eurobond Funds: Eurobond investors would still want to be paid even if the plant goes out of production. They will also want to be paid most likely in US dollars or some European currency; it is unlikely that the Eurobonds would be denominated in either rubles or Canadian dollars. Hence the approach would be to discount the cash flows for economic/political risk, discount them for the currency depreciation, make payments on the Eurobonds, and then determine the net present value of the remainder. The quick calculation shows that this is still a positive net present value option. After more careful analysis both choices would likely yield a positive net present value, although which one is higher is not obvious. While one can make estimates for the risks and include them as suggested, it is clear that the Eurobond option exposes the firm to higher economic/political and exchange rate risks. It also requires that funds be repatriated to pay off the bonds, while with the bank...
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...Indeed, the higher yields the bond provides, the more risky the investment. In order to attract investors, companies offer a higher return than the government. The bond rating help in estimating the default risk Domestic bond market: the bonds are issued by a domestic borrower in his own country. Most of time, we can find bonds denominated in the local currency. Foreign bond market: a foreign borrower issues bonds on another market than his local market. Most of time, we can find bonds denominated in the local currency. Exchanges of bonds issued by a foreign entity are under local market authorities’ control. We have to determinate what a Eurobond is. The word "Eurobond" might be misunderstood. Indeed, Eurobonds do not mean bonds of European countries or euro-denominated bonds. EXAMPLE: Usually, some large firms issue Eurobonds to raise funds in...
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...suggested to consider borrowing in British pounds sterling in order to take advantage of a borrowing opportunity in that currency. Carrefour is exposed to exchange rate risk because of foreign-currency exposure from imported goods. This risk was being hedged through forward contracts. The €13.5 billion of debt on the Carrefour books is 97% hedged in Euro currency, €6.4 billion of that being publicly traded bonds. Carrefour has a large exposure risk to the Euro because of their hedging policy. 2) Why does the Eurobond market exist? A Eurobond is an international bond that is denominated in a currency not of the currency to the country where it is issued. Like many bonds, Eurobonds are usually fixed-rate, interest-bearing notes, although many are also offered with floating rates and other variations. Most pay an annual coupon and have maturities of 3-7 years. Eurobond issues are made to cater to the issuers' and investors' needs, and can vary in terms and form substantially. The Eurobond market exists for large corporations such as Carrefour to make transactions involving cheaper access to capital in a particular currency or funds at a lower interest rate that two or more parties capitalize on by exchange payments on parallel or opposing debt issues to take advantage of arbitrage conditions or complementary financial advantages. 3) What can a firm do to manage the exchange rate risk of foreign currency...
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...Does Europe need a lender of last resort? German Chancellor Angela Merkel and French President Nicolas Sarkozy appear to hope their recent Summit will avoid further increasing Euro rescue fund, the European Financial Stability Facility (EFSF), or issuing joint Eurobonds. Both measures are extremely unpopular in Germany, which sees itself as the financier of spendthrift southern Euro zone member countries. Germans are only willing to pay with “their” money in “return” for strict austerity measures. And, as Merkel has said, Eurobonds would only be considered as last means. The German Chancellor seems to believe that the Euro zone is not yet at the point where last resort measures need to be considered seriously. Unfortunately, Mrs Merkel may be wrong. Are we there yet? There are a number of compelling reasons to back this. With Italy and Spain (and eventually France and Belgium) in peril, even a tripling or a quadrupling of the ESFS fund would not be sufficient. And by providing such funds the debt crisis would surely arrive in Germany, too. So far, imposed austerity measures have induced recessions in the debtor countries, Euro zone economic growth is flat and even in Germany zero growth was reported in the last quarter. All this makes it more difficult to grow out of the debts. Financial markets and especially interbank markets are increasingly showing signs of resembling the conditions preceding the global financial crisis conditions – strongly suggesting that another...
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...Emerson Electric Company Over the past three years, Emerson Electric Co.’s international sales revenue has been satisfyingly increasing. At the same time, the company switched its strategy from exporting to offshore production. To finance the general corporate activities, Bousquette, CFO of the company, is considering raising $65 million by issuing two-year bonds. The three options that management has are 1) an 8.65% domestic bond, 2) a 4.58% Swiss Eurobond, 3) an 18.55% New Zealand Eurobond. In order to determine which debt issue will be the best choice for the company, economic forecasts for the three countries are reviewed. And I believe that the US bond would be the best choice among the three. The rationale behind this decision are illustrated as follows. The NZ bond with an interest rate as high as 18.55% seems to be a nonstarter choice at first glance. However, it may not be the truth. The negative effect brought by the high coupon rate can be greatly offset by the high inflation rate when coupons are paid out. Thanks to the increasingly high inflation rate which will depreciate the value of NZ dollars, less US dollars will be actually needed to pay back the loan. Taking Purchasing Power Parity and International Interest Rate Parity into consideration, given such a high inflation rate (high depreciation of NZ dollars), it is hard to determine whether NZ is a bad choice or not. To raise US$65 million, without taking the time value of money into account, Emerson will...
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...CARREFOUR S.A. Synopsis and Objectives In August 2002, the French retail giant Carrefour S.A. is considering alternative currencies for raising (euros) EUR750 million in the eurobond market. Carrefour’s investment bankers provide various borrowing rates across four different currencies. Despite the high nominal coupon rate and the lack of any material business activity in the United Kingdom, the British-pound issue appears to provide the lowest cost of funds if the exchange rate risk is hedged. The case is designed to serve as an introduction to topics in international finance. Topics of discussion include foreign-currency borrowing, interest-rate parity, currency risk exposure, derivative contracts (in particular forward and swap contracts), and currency risk management. Students are tasked with exploring (1) motives for borrowing in foreign currencies, (2) the exposure created by such financing policy, and (3) strategies for managing currency risk. Suggested Questions for Advance Assignment to Students 1. Why should Carrefour consider borrowing in a currency other than euros? 2. Assuming the bonds are issued at par, what is the cost in euros of each of the bond alternatives? 3. Which debt issue would you recommend and why? Hypothetical Teaching Plan 1. What is going on at Carrefour? 2. Is the Swiss-franc issue, at 3⅝%, a “no-brainer”? 3. What can a firm do to manage the exchange-rate risk...
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...Japan’s Nikkei 255 stock average Public launch depends on the price of NPWs (Nikkei put warrants) 1987, BS issued currency warrants by GECC, heavily subscribed. Selling echange-listed currency warrants made three important impressions on GS team. 1. while investors were interested in puts on the yen, puts on the Nikkei would be much more widely demanded. 2. Profits to be made from buying options (sourcing volatility) in institutional markets and resell to retail customers 3. New markets could quickly become satiated. The prices of the currency warrants fell quickly from the initial deal levels Exhibit 1 daily implied volatilities of exchange-listed yen currency warrants 1988, IFR reported the first of a series of recent Eurobonds whose redemption values at maturity were tied to the level of the Nikkei 225 stock average. Exhibit 2 Representative Nikkei-Linked Euro-Yen offerings, Dec 1989 Exhibit 3 Hypothetical Nikkei-Linked Euro-Yen Transactions Through a set of swaps, the issuer transformed its annual fixed-rate yen payments in to dollar-dominated LIBOR-based payments. At maturity, the issuer would redeem the bonds from the investor a price tied to the Nikkei. If Nikkei fell since the bonds were issued, the issuer would pay less than par to redeem the bonds. Thus, it would be as if the issuer sold bonds with final principal payments at par but also bought a put option on the Nikkei maturing in the same years as the bond. If the Nikkei fell, the put...
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...The Effect Of Capital Structure When Expected Agency Costs Are Extreme The Effect of Capital Structure when Expected Agency Costs are Extreme Harvey, C.R. Lins, K.V. Roper, A.H. Journal of Financial Economics 74 (2004) 3-30 RESEARCH MOTIVATION The objective of this paper is, using international evidenceto investigate whether debt can mitigate the effects of agency and information problems. Prior theoretical research has shown that debt can be used to align managers’ interest. More specifically, when a meaningful conflict exists between outside shareholders and management due to the separation of ownership and control, debt helps to discourage overinvestment of free cash flow by self-serving managers (Jensen Meckling [1976], Jensen [1986] Stulz [1990] and else). Moreover, even without conflicting interest, debt gives management the opportunity to signal its willingness to pay out cash flows or be monitored by lenders or both, and thus to show that they do not or will not overinvest (Ross [1977] and else). Benefits to debt could be greater (1) when management has a large base of assets in place that it can exploit, because assets in place generate cash flow that can lead to either overinvestment or the outright diversion of corporate funds (Jensen [1986] and else) or (2) when management has few future growth opportunities, because when a firm has expected future growth opportunities, debt can limit management’s ability to pursue positive net present value projects, leading...
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...The Euro Crisis According to Wikipedia (2012), the Euro Zone is comprised of 17 members that have accepted the euro as their only method of payment for goods and services. Monetary policy and management of inflation levels is governed by the ECB (European Central Bank) which consists of a president and board originating from central banks within the area. Since the late 2000's the Euro zone has experienced financial troubles mainly resulting from the varying degrees of difference between fiscal and monetary policy within each country. The majority of the debt can be attributed to the increase in both public and government debt around the globe as well as the arising debt within the euro zone. Some countries were noted for their involvement in the property crisis while other countries including Greece developed most of their financial obligations from increased public sector wages and pension contributions at an unsustainable level. As the desire for higher yielding investments expanded, many investors sought global markets as those offered by the U.S. Treasury. Norbert Walter (2012) argues that different growth rates, employment levels and unit labor costs have attributed to the euro crisis leading to heightened risk premiums and increased capital flights to those with lower risk assessments. Trade imbalances resulted from rising labor costs within several countries as well as accumulation of trade surpluses between those with the same currency that prevented appreciation...
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...Case Analysis International Financial Markets Peter MacKay February 21, 2002 Ryan Case Mark Duncanson Christopher McRoberts Jenn Nabb Rob Norr Due to past depreciation in the yen, Disney has decided to consider hedging future yen royalties paid by Tokyo Disneyland. Disney can enter into a currency swap to capitalize on its comparative advantage to borrowing in its local debt market and therefore obtain interest rates more favorable than the French utility could hope to obtain. Each party then swaps the currency they could receive at lower rates and share in the overall benefit. Disney may also wish to hedge long-term foreign exchange exposures since future fluctuations of a currency can erode a project’s NPV to the point of rendering it unprofitable. Furthermore, Disney could have reached the limit of their borrowing capabilities and are looking for a way to borrow more. It is an indirect way of going into capital markets to obtain a desired currency. Both Disney and the French utility have the opportunity of obtaining loans with lower overall costs. They can also convert fixed-rate debt into floating-rate debt (or vise versa) to better match revenue streams. IBJ can benefit from this arrangement through commissions and fees. As currency swap activity increases, the revenue generated from this activity has become significant. The swap bank also benefits when it pays out less than it receives from each counter party to the other counter party. Currency swaps are off-book...
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