Eurobond: A bond issued in a currency other than the currency of the country or market in which it is issued. (A Eurobond denominated in Japanese Yen anywhereexcept Japan).Eurobonds provide the flexibility to the issuer to choose country.There are 2 types of bonds convertible and callableoConvertible means in 10 years you can convert the bonds into stocks. Bonds can be issued to pay dividends as well as minimize negative investor interpretations of its corporate actions.oInclude call provision: you can call your bonds back in 10, 20 years. The reason is interest rate (you will call your bonds back and issue them at a lower rate). 6.Stock Market and ADRsA stock is issued to get long term finance.Investors may/may not get dividendAmerican Depository Receipts (ADR)oCertificates representing bundles of stock.
oADR shares can be traded just like shares of a stock.oValue of ADR should move in tandem with the value of correspondingstock that is listed on the foreign stock exchange.oExample: The share price of Nokia was 20 euros when the Finnish stock market closed. As the U.S stock market opens, the euro is worth $1.05, so the ADR price should be: PADR = PS X S = 20 X $1.05 = $217.Cross Exchange RateMany currency pairs are inactively traded, so their exchange rate is determined through their relationship to a widely traded third currency.It is the exchange of two non US dollar currencies.Example: If 1 MXN (Mexican Peso) is worth US $0.07 and, CAD dollar is worthUS $ 0.70; Let’s find value of MXN Peso in CAD$Peso in CAD$ = Value of Peso in $ / Value of CAD in $i.e. $0.07 / $0.70MXN Peso= CAD 0.108.Balance of Trade and J CurveThe difference between total exports and imports is referred to as the balance of trade. A deficit in the balance of trade means that the value of merchandise and services exported by the United States is less than the value of merchandise and services imported by the United States. Correcting balance of trade: Devaluation of a currency may help to reduce balance of trade. Export oriented sector may be subsidized.J Curve Effect: The short-run tendency for a country's balance of trade to deteriorate even while its currency is depreciating.9.Exchange Rate Movements and Cross Exchange RatePercentage change in value of foreign currency(S – St – 1)/St – 1A positive percent change indicates that the currency has appreciated. A negative percent change indicates that it has depreciated.“The dollar was mixed in trading”.Real interest rate=Nominal interest rate-inflation rateThe movement in a cross exchange rate over a particular period can be measured as its percentage change in that period.