## International Financing

International financing refers to raising funds from outside India using foreign markets, instruments, and institutions.

### Sources of External Financing

Source	Keywords
Commercial Banks	Foreign currency loans and overdrafts
Development Banks	Long/medium-term FC loans; e.g., EXIM Bank USA, govt export agencies
Discounting Bills	Common in Asia/Europe; short-term trade bill financing
International Agencies	IFC, IBRD, ADB, IMF — fund international trade
International Capital Markets	Used by MNCs; access via Euro-currency market, bonds, institutions

### Euro-Currency Market

Originated with Euro-dollar deposits (USD held outside the USA, e.g., in London)
Banks lend in dollars outside the US banking system
Key instruments: Eurocredits, FRNs, Euro CDs

### Key International Financial Instruments

Instrument	Explanation
ECB (External Commercial Borrowings)	Loans from non-resident lenders; minimum maturity 3 years
Euro Bonds	Issued in a currency not of the issuing country; bearer bonds
Foreign Bonds	Issued in another country in that country's currency
Fully Hedged Bonds	All cash flows hedged using forward contracts
MTN (Medium Term Notes)	Flexible issuance in lots under one documentation
FRN (Floating Rate Notes)	Interest resets periodically; cheaper than loans
ECP (Euro Commercial Papers)	< 1 year maturity; USD-dominated; money market instrument
Foreign Currency Options	Right (not obligation) to buy/sell FC at set price; used for hedging
Foreign Currency Futures	Obligation to exchange FC at future date

### Euro Bond vs. Foreign Bond

Feature	Euro Bond	Foreign Bond
Currency	Different from country of issue	Same as country of issue
Example	USD bond issued in UK	USD bond issued in USA by foreign company (Yankee Bond)
Typical Issuer	MNCs	Foreign corporations

> Country-specific names for Foreign Bonds:

> Yankee Bond (USA), Bulldog Bond (UK), Samurai Bond (Japan), Kangaroo Bond (Australia)

Worked example

### Example 1

An Indian company raises a 5-year loan from a Japanese bank in USD. Since the lender is a non-resident and the minimum maturity is 3 years, this qualifies as an External Commercial Borrowing (ECB).

### Example 2

A German company issues a bond denominated in JPY in Japan. This is a Foreign Bond (issued in Japan, in Japan's currency). If the same company issued a JPY bond in London, it would be a Euro Bond (JPY in a non-Japan country).

### Example 3

An importer needs to pay $1 million in 3 months. To hedge, she buys Foreign Currency Options — the right to buy $1 million at today's rate. If the USD rises, she exercises the option and saves money. If USD falls, she lets the option lapse and buys at spot — options provide one-sided protection.

### Example 4

The same importer instead uses Foreign Currency Futures — she must exchange at the contracted rate on the future date, regardless of what happens to spot rates. Futures offer certainty but no flexibility.

⚠️ Common exam mistakes

Confusing Euro Bond with bonds issued by European companies — Euro Bond refers to the currency mismatch (issued in a currency different from the country of issue), not the issuer's nationality.
Treating ECB as any foreign borrowing — ECBs specifically require minimum 3-year maturity and must be from non-resident lenders.
Confusing FC Options with FC Futures — Options give the right but not the obligation; Futures create an obligation for both parties.
Thinking Euro Commercial Paper (ECP) is long-term — ECP is a money market instrument with maturity less than 1 year.

Reference:

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International Financing – Sources, Euro-Currency Market & Instruments

Worked example

⚠️ Common exam mistakes