Terminology

A common buzzword for the student of business finance is globalization. The first step in learning about the globalization of financial markets is to conquer the new vocabulary. As with any specialty, international finance is rich in jargon. Accordingly, we get started on the subject with a highly eclectic vocabulary exercise.

The terms that follow are presented alphabetically, and they are not all of equal importance. We choose these particular ones because they appear frequently in the financial press or because they illustrate the colorful nature of the language of international finance.

1. An American Depository Receipt (ADR) is a security issued in the United States that represents shares of a foreign stock, allowing that stock to be traded in the United States. Foreign companies use ADRs, which are issued in U.S. dollars, to expand the pool of potential U.S. investors. ADRs are available in two forms for a large and growing number of foreign companies: company sponsored, which are listed on an exchange, and unsponsored, which usually are held by the investment bank that makes a market in the ADR. Both forms are available to individual investors, but only company-sponsored issues are quoted daily in newspapers.

2. The cross-rate is the implicit exchange rate between two currencies (usually non-U.S.) when both are quoted in some third currency, usually the U.S. dollar.

3. A Eurobond is a bond issued in multiple countries, but denominated in a single currency, usually the issuer's home currency. Such bonds have become an important way to raise capital for many international companies and governments. Eurobonds are issued outside the restrictions that apply to domestic offerings and are syndicated and traded mostly from London. Trading can and does take place anywhere there is a buyer and a seller.

4. Eurocurrency is money deposited in a financial center outside of the country whose currency is involved. For instance, Eurodollars—the most widely used Eurocurrency—are U.S. dollars deposited in banks outside the U.S. banking system.

5. Foreign bonds, unlike Eurobonds, are issued in a single country and are usually denominated in that country's currency. Often, the country in which these bonds are issued will draw distinctions between them and bonds issued by domestic issuers, including different tax laws, restrictions on the amount issued, and tougher disclosure rules.

Foreign bonds often are nicknamed for the country where they are issued: Yankee bonds (United States), Samurai bonds (Japan), Rembrandt bonds (the Netherlands), Bulldog bonds (Britain). Partly because of tougher regulations and disclosure requirements, the foreign-bond market hasn't grown in past years with the vigor of the Eurobond market. A substantial portion of all foreign bonds are issued in Switzerland.

Ross et al.: Fundamentals of Corporate Finance, Sixth Edition, Alternate Edition

VIII. Topics in Corporate Finance

22. International Corporate Finance

© The McGraw-Hill Companies, 2002

CHAPTER 22 International Corporate Finance

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