Eurobonds Are Not Only For The Europeans
What exactly is a Eurobond? Well, it's a bond which is issued as well as traded in a different country from the one where its currency is denominated. The funny thing is that a Eurobond does not necessarily have to originate or circulate only in Europe. Most Eurobonds however, are issued for trade by investors in Europe.
Now this can get quite creative. You could have a Eurobond denominated in US dollars but an Australian company can issue them in Japan. Or you could have the French issuing these bonds that are traded in Japanese markets. Look at Wal-Mart for example. They issue these bonds which are denominated in US dollars but sell in the exchanges in Germany! What's more, the Iran government floats them too.
In the international bond market, you'll find that most of the new issues are in Eurobonds and these add up to being larger than the $14 trillion US bond market. The thing is that there is a lot of scope for creative financing with Eurobonds and one can choose a country after looking at the regulations as well as the tax environment there.
All this of course does not get rid of the element of risk which Eurobonds come with. Let's face it – one is more familiar with all the laws and regulations in one's own country than elsewhere. Even though one is privy to so much more information and news thanks to the Internet, there's still a lot that one is not fully aware of. There is bound to be a certain degree of ignorance about the way things work in a far-off country, about the implications of the written word and events that don't really come out in the news. What happens so far away could in a way constitute a risk if one is not fully aware of the whole picture.
The other thing is the sensitivity of foreign currency trading. While bond trade in the international markets is fairly small, the foreign currency trading is huge and is definitely more volatile and currency risk is something one has to contend with when one is in the international financial arena. There are price swings that can be quite huge and there is a sensitivity in many countries to the political climate and the changes that take place.
Let's look at an example. If an investor in the US pays 1170 at today's exchange rates of £1 GBP = $1.77USD for a £1000 Eurobond and the maturity date was 5 years later, when he gets his money back, let's assume that the exchange rate has dropped to £1 = $1.66. He will get paid back in GBP because that is the currency of the bond. However, when it gets converted to dollars, he will only get $1,660 and not $1.77USD which is the least he would have expected when he bought the bond. Now this is the loss that arises because of currency risk. If it were the other way and the dollar went down, he would get much more than he expected.
This is why it's a risky market but there are people who make their millions there. What helps is a lot of research and one needs to have the big picture of past performances as well as current patterns to be able to predict reasonable returns with any degree of accuracy. If you do get adept at it, the fact that there is so much of global news and views on the Internet can only work to your advantage.
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