Chapter 3

Module No.
3: International Financial
Markets and Instruments
 Foreign Portfolio Investment. International Bond & Equity market.
 GDR, ADR, Cross listing of shares Global registered shares.
 International Financial Instruments: Foreign Bonds & Eurobonds, Global Bonds.

Floating rate Notes, Zero coupon Bonds,
What Is Foreign Portfolio Investment (FPI)?
Foreign portfolio investment (FPI) consists of securities and other financial assets held by investors in another
country. It does not provide the investor with direct ownership of a company's assets and is relatively liquid
depending on the volatility of the market. Along with foreign direct investment (FDI), FPI is one of the common ways
to invest in an overseas economy. FDI and FPI are both important sources of funding for most economies.
Understanding Foreign Portfolio Investment (FPI)

Portfolio investment involves the making and holding of a hands-off—or passive—investment of securities, done with
the expectation of earning a return. In foreign portfolio investment, these securities can include stocks, american
depositary receipts (ADRs), or global depositary receipts of companies headquartered outside the investor's nation.
Holding also includes bonds or other debt issued by these companies or foreign governments, mutual funds, or
exchange traded funds (ETFs) that invest in assets abroad or overseas.
An individual investor interested in opportunities outside their own country is most likely to invest through an FPI. On
a more macro level, foreign portfolio investment is part of a country’s capital account and shown on its balance of
payments (BOP). The BOP measures the amount of money flowing from one country to other countries over one
monetary year.
International Bond Market has three Classifications:
1.Foreign Bonds. In foreign bonds, the issuer is from one country, but he issues the bonds in some
other country. The issuer issues these bonds in the local currency of the country where he is issuing
bonds. An example of a foreign bond will be a US company issuing bonds to raise capital in India. The
US company will issue the bonds in Indian Rupee. As a result, Indian investors will not be subject to
the ups and downs of the foreign exchange market. They will invest in Indian Rupee, earn interest in
Indian Rupee, and will get their principal back in Indian Rupee. An Indian company or can also issue
bonds in India in Indian Rupee. But these bonds will be called Domestic Bonds. So, for a bond to
classify as Foreign Bond, it must come from a foreign issuer.
2. Euro Bond. In Euro Bond, a foreign entity issues a bond in the domestic
market. The issuer issues a bond in a currency that is not the domestic
currency of that country. So, a Eurobond in US currency can be issued in any
country other than the US. If a US company issues bonds in Japan in Pound
sterling, it will also be an example of a Eurobond. Eurobond is a result of
unfavorable tax regimes of the 1960s in the US. This led to the US
companies issuing bonds in US dollars outside of the USA. Here, the
investors will be subject to ups and downs in the foreign exchange rate
3. Global Bonds. Apart from foreign bonds and euro bonds, some companies,
though rarely, issue global bonds. In global bonds, bonds are issued in
multiple countries at a go and often in multiple currencies. Usually, large
multinational corporations issue global bonds.
International Bond Markets
Advantages of Participation in International

Bond Markets Disadvantages of Participation in
International Bond Markets
 Diversification  Exchange rate volatility
 Increased exposure  Lack of liquidity
 Higher returns
 Hedging
To invest in the equity of a firm, we have stock exchanges in different countries like
NASDAQ for the US and HKEx for Hongkong. Retail investors, institutional investors,
and firms invest in public companies for buying their equity shares/stakes. The aim is
to take up a share of the company’s equity capital to earn and grow with the growth
of the company and/or become a partner of the company. For this purpose, there are
instruments through which an investor sitting in the US can invest funds in London
Stock Exchange. Moreover, such an opportunity has widened the scope of capital flows
between different countries and led to globalization.
https://efinancemanagement.com/international-financial-management/international-e
quity-market
- NOTES
Instruments of the International Equity Market
Even US firms will now expand their purview and raise funds from different parts of the world. The idea is to raise
money for international projects at low costs and commissions. Likewise, there are many ways for investors to
invest in international equity markets:
1. Direct Investment
The international investment process is now quite eased out. And the investors these days can directly invest in the
international market through local apps and websites. Therefore, the process is easy and accessible to retail
investors. Retail investors can use various apps, sitting in the comfort of their houses to invest in the equity of
companies based in various parts of the world.
2. American Depository Receipts (ADR)

ADR is a certificate issued by a bank based in the US that reflects shares in foreign stock. Let us say a US bank
represents shares of Barclays on the stock exchange of the US. And the shares are bundled together to form one
ADR that is further sold to the investors. This way, Barclays reduces the hassle of listing itself on the US stock
exchange and still can approach and onboard now American investors. There are two types of ADR, sponsored and
unsponsored ADR. In the case of sponsored ADR, only one bank is legally allowed to represent the shares of the
company, and the bank shares a contract. While, in unsponsored ADR, there is no legal contract from the Foreign
Global Registered Shares (GRS)
A share is issued in the US but is traded on multiple exchanges of the world in
different currencies. Moreover, the owner of the share has dividend and ownership
rights equivalent to any other investor. Let us say a firm is listing its shares on
NYSE and London stock exchange; then the firm is issuing global registered shares.
Currently, with diminishing boundaries and globalization GRS is becoming an
attractive concept compared to ADR.
International Equity Fund
Mainly, Mutual funds that invest more than 80% of their assets in foreign stocks or
equity form an International equity fund. A fund or group in the US investing in the
funds or equity of US tech companies is an example of international equity funds. A
fund manager and other key members will invest money in foreign funds or equity.
This way, one can access the global market by trusting a skilled fund manager who
knows the functioning of the various funds.
Depositary Receipt (DR)
(be in India trade and issue shares in US)
 A depositary receipt (DR) is a negotiable certificate issued by a bank representing
shares in a foreign company traded on a local stock exchange. The depositary
receipt gives investors the opportunity to hold shares in the equity of foreign
countries and gives them an alternative to trading on an international market.
 A depositary receipt, which was originally a physical certificate, allows investors to
hold shares in the equity of other countries. One of the most common types of DRs is
the American depositary receipt (ADR), which has been offering companies,
investors, and traders global investment opportunities since the 1920s.

MEANING OF AMERICAN DEPOSITORY RECEIPT (ADR)
American Depository Receipt (ADR) is a certified negotiable instrument issued by an
American bank suggesting the number of shares of a foreign company that can be
traded in US.
 AMERICAN DEPOSITORY RECEIPT (ADR) EXAMPLE
 Volkswagen, a German company trades on New York Stock Exchange. The investor in
America can easily invest into the German company, through the stock exchange.
Volkswagen is listed on the American stock exchange after complying the required
laws.
DEFINITION OF GLOBAL DEPOSITORY RECEIPT
 Global Depository Receipt (GDR) is an instrument in which a company located in
domestic country issues one or more of its shares or convertibles bonds outside the
domestic country and US. In GDR, an overseas depository bank i.e. bank outside
the domestic territory of a company, issues shares of the company to residents
outside the domestic territory. Such shares are in the form of depository receipt or
certificate created by overseas the depository bank.

 Issue of Global Depository Receipt is one of the most popular ways to tap the global
equity markets. A company can raise foreign currency funds by issuing
equity shares in a foreign country.
Floating Rate Notes (FRNs) are fixed income securities that pay a
coupon determined by a reference rate which resets periodically. As the reference
rate resets, the payment received is not fixed and fluctuates overtime. FRNs are in
demand among investors when it is expected that interest rates will increase.
A floating-rate note (FRN) is a debt instrument with a variable interest rate. The
interest rate for an FRN is tied to a benchmark rate. Benchmarks include the U.S.
Treasury note rate, the Federal Reserve funds rate—known as the Fed funds rate—the
London Interbank Offered Rate (LIBOR), or the prime rate.
Features
1. Debt instrument
2. Issue price
3. Coupon rate is not fixed
4. Maturity period
5. Coupon rate depending on benchmark index
Zero coupon bonds are bonds that do not pay interest during the life of the
bonds. Instead, investors buy zero coupon bonds at a deep discount from their
face value, which is the amount the investor will receive when the bond
"matures" or comes due.
A zero-coupon bond is a bond that pays no interest and trades at a discount to
its face value. It is also called a pure discount bond or deep discount
bond. U.S. Treasury bills are an example of a zero-coupon bond

Debt
instrumen
t
Less Maturity
Liquidity period
Features of
ZCB
Sell below Issued at

the par discount
value price
Pays no
interest

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Module No.

 GDR, ADR, Cross listing of shares Global registered shares.

 International Financial Instruments: Foreign Bonds & Eurobonds, Global Bonds.

Understanding Foreign Portfolio Investment (FPI)

Advantages of Participation in International

between different countries and led to globalization.

2. American Depository Receipts (ADR)

 A depositary receipt (DR) is a negotiable certificate issued by a bank representing

shares in a foreign company traded on a local stock exchange. The depositary

countries and gives them an alternative to trading on an international market.

 A depositary receipt, which was originally a physical certificate, allows investors to

investors, and traders global investment opportunities since the 1920s.

American Depository Receipt (ADR) is a certified negotiable instrument issued by an

 AMERICAN DEPOSITORY RECEIPT (ADR) EXAMPLE

 Global Depository Receipt (GDR) is an instrument in which a company located in

domestic country issues one or more of its shares or convertibles bonds outside the

the domestic territory of a company, issues shares of the company to residents

certificate created by overseas the depository bank.

"matures" or comes due.

A zero-coupon bond is a bond that pays no interest and trades at a discount to

bond. U.S. Treasury bills are an example of a zero-coupon bond

Sell below Issued at

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