International finance concepts and applications

International Finance

The performance of stock market indices is subject to a wide number of variables. In the past six months, one of the more interesting international markets to watch has been India. In late May, Narendra Modi ascended to the Prime Minister office in India, the highest position. His election campaign was controversial, being viewed by many as overtly nationalist, something that threatened to destabilize multicultural India. This, combined with India's status as a major emerging economy, has made India's stock market an interesting study. The BSE Sens, referring to the Bombay Stock Market, today sits at 26459. Six months ago, it was at below 23,000. The gain has been around 17% in the past six months, versus around 6% in the S&P 500.

It would appear that the Indian stock market has specifically gained a boost from the political environment. The Modi government was feared by many observers as a potential cause of civil strife in the country, but since his election that civil strife has failed to materialize. This has allowed the markets a moment to foster optimism. Observers have argued that reforms to government from the Modi regime will be positive for economic performance and therefore the markets. This, combined with the lack of problems associated with the new regime, is credited with spurring growth in Indian stocks (Anand, 2014).

2. There are a number of types of bond instruments that are available for financing via debt. These include zero coupon bonds, floating rate notes, callable bonds, vanilla bonds and debentures (Stanlib.com, 2014). These represent a number of choices. A vanilla bond is just a basic bond, paying interest semi-annually, and issued at par. A zero coupon bond is not sold at par, because the lack of a coupon means that the issuer needs to offer it at a discount in order to move it. A call feature on a bond is valuable to the issuer, so again such a bond would need to be issued at a discount, albeit not as large a discount as a zero bond would have. Debentures on very long-term bonds.

There is also the question of currency. The issuer in this example is European, which we will presume deals primarily in Euros (though ideally this would be specified, as major banking nations like the UK and Switzerland have their own currencies). A Eurodollar is a deposit held at a foreign bank, but that is denominated in USD.

With respect to the type of instrument, the theory is that all of these different instruments will be sold at par value, once the features have been accounted for. This implies that any option is equally good -- the reality is that a vanilla bond is usually more desirable. These are easier to manage in terms of the issue, and they have greater liquidity as well, which will allow the issuer to recoup the full par value for the issue. Economically, a basic bond is the most efficient structure.