## International Financing

### Overview

International financing refers to raising funds outside India using foreign markets, instruments, and institutions. Companies can raise funds through internal (domestic) or external (international) sources.

---

### External Sources of International Finance

Source	Key Features
Commercial Banks	Provide foreign currency loans and overdrafts
Development Banks	Long/medium-term FC loans; e.g., EXIM Bank USA, government export agencies
Discounting Bills	Common in Asia/Europe; short-term financing against trade bills
International Agencies	IFC, IBRD, ADB, IMF — fund international trade and infrastructure
International Capital Markets	Used by MNCs and Indian companies to raise large foreign currency funds via Euro-currency market, bonds, institutions

---

### Euro-Currency Market

Originated with Euro-dollar deposits (USD held in banks outside the USA — e.g., London)
Banks lend in foreign currencies (primarily USD) outside the domestic banking system
Key instruments: Eurocredits, FRNs, Euro CDs

---

### Key Financial Instruments in International Markets

Instrument	Explanation
ECBs (External Commercial Borrowings)	Loans from non-resident lenders (banks, capital markets, ECAs); minimum tenure 3 years
Euro Bonds	Issued in a currency not of the issuing country; sold internationally; bearer bonds
Foreign Bonds	Issued in another country in that country's own currency
Fully Hedged Bonds	All cash flows (interest + principal) are fully hedged using forward contracts
Medium Term Notes (MTN)	Flexible issuance in lots under one documentation framework
Floating Rate Notes (FRN)	Interest resets periodically; typically cheaper than bank loans
Euro Commercial Papers (ECP)	Tenor < 1 year; USD denominated; money market instrument
Foreign Currency Options	Right (not obligation) to buy/sell foreign currency at a set price; used to hedge forex risk
Foreign Currency Futures	Obligation to exchange foreign currency at a future date at a pre-agreed rate

---

### Euro Bond vs Foreign Bond — Critical Distinction

	Euro Bond	Foreign Bond
Currency	Different from the country of issue	Same as the country where issued
Example	Indian company issues bond in USD in UK	Indian company issues bond in GBP in UK
Country-specific names	—	Yankee (US), Samurai (Japan), Bulldog (UK)

---

### Key Abbreviations

ECB = External Commercial Borrowing
ECA = Export Credit Agency
FRN = Floating Rate Note
ECP = Euro Commercial Paper
IBRD = International Bank for Reconstruction and Development
IFC = International Finance Corporation
ADB = Asian Development Bank
IMF = International Monetary Fund

Worked example

### Example 1

Reliance Industries raises $1 billion through Euro Bonds (say, USD-denominated bonds issued in London). Since USD is not the currency of issue (UK uses GBP), these are Euro Bonds. Investors globally buy them. Reliance gets dollar financing at potentially lower rates than domestic rupee bonds.

### Example 2

A Japanese company issues bonds in the USA denominated in USD (the local currency). These are Foreign Bonds — specifically called Yankee Bonds. The company is foreign, but the bond is in the host country's currency. Contrast: if the same company issued USD bonds in Germany, they'd be Euro Bonds.

### Example 3

An Indian exporter has a $500,000 receivable due in 6 months. To hedge, the exporter buys a Foreign Currency Put Option giving the RIGHT to sell $500,000 at ₹83/$. If the dollar falls to ₹78, the exporter exercises the option and still receives ₹83/$. If the dollar rises to ₹88, the option is abandoned — the exporter sells at the better spot rate. This illustrates options as a hedge.

### Example 4

Infosys raises ECB (External Commercial Borrowing) of $200 million from a US bank at 5% for 5 years (minimum 3-year tenure). It must comply with RBI ECB guidelines on end-use (cannot use for real estate or equity investments). This shows the regulatory framework governing international borrowing by Indian companies.

⚠️ Common exam mistakes

Confusing Euro Bond with European bond — a Euro Bond has nothing to do with Europe specifically; it is defined by being issued in a currency DIFFERENT from the country where it is sold.
Confusing Foreign Currency Options with Futures — Options give the RIGHT but not obligation; Futures create an OBLIGATION for both parties to transact.
Confusing ECBs with Euro Bonds — ECBs are loans from foreign lenders (bank-to-company); Euro Bonds are publicly issued securities in international capital markets.
Stating Fully Hedged Bonds eliminate all risk — they eliminate CURRENCY risk only (via forward hedges on cash flows); credit risk and interest rate risk may remain.
Confusing FRN (Floating Rate Note) with ECP (Euro Commercial Paper) — FRNs are medium-to-long term with periodically resetting interest; ECPs are short-term (< 1 year) money market instruments.

Reference:

Now that you've read this — what's next?

Move from understanding → mastery in 3 clicks. Each option below picks up from this lesson's topic.

🔥 Drill 5 Qs on this → ✍️ Adaptive practice →

International Financing — External Sources and Instruments Used in International Markets

Worked example

⚠️ Common exam mistakes