Institute of Chartered Financial Analysts of India (ICFAI) University 2006 Certification Finance International and Trade – II - Question Paper

vii. Disclosure Requirements: The disclosure requirements for an international problem are more stringent as compared with a domestic problem. The requirements would, however, differ depending upon the market addressed and the place where listing is sought.

viii. Investment Climate: The international offering would be affected by factors like the international liquidity and the country risk, which will not have an effect in a domestic problem. With the current country rating, companies have to depend on the strength of their balance sheets to raise funds at competitive rates in the international markets.

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2. Euro dollar market is mostly unregulated. This meant that Eurodollar banks could offer higher rates on deposits and charge lower rates on loans. So the most important factor affecting the supply of and demand for Eurodollars is the desire of dollar depositors to receive highest yield and the desire of dollar borrowers to pay the least interest on loans. Because of the absence of reserve requirements, deposit-insurance requirements and other costly regulations, the Euro banks can offer higher yields on dollar deposits than can US Banks. At the identical time, the Euro banks can charge lower interest on their advances. The lower interest rates on loans are made possible by the absence of severe regulations and by the sheer size and number of informal contacts among Euro banks. Higher rates on deposits and lower costs to borrowers mean operating on narrow spreads for banks. So the growth of Eurodollar market is best attributed to the ability of the Euro banks to operate on a narrow spread.

There are a few advantages AIL can derive by borrowing Eurodollars rather than dollars in USA. There are many regulations of Federal Reserve like reserve requirements, deposit insurance etc., which make dollar deposits costly in the US. The controls and restrictions of Federal Reserve on borrowing funds in the US for reinvestment abroad make dollar borrowing costly for the outsiders. Euro currency market does not face such stiff financial regulations as the US domestic banking system. Also the flow of dollars in the Eurocurrency market is sufficient to keep the euro dollar interest rate lower than US domestic rates. Also credit rating criteria is much more lenient in euro currency markets than in the US. So the cost of borrowing will also be lower in Eurocurrency market than in US market.

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3. Eurocurrency interest rates cannot differ much from rates offered on similar deposits in the currency’s home country. As we know, the rate offered to Eurodollar depositors is slightly higher than in the United States, and the rate charged to borrowers is slightly lower. every country’s market interest rates influence the euro currency interest rates, and vice versa, as they are all part of the global money market. The total supply of every currency in this global market, together with the total demand, determines the rate of interest.

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