16.2. INTERNATIONAL BOND & COMMERCIAL-PAPER MARKETS 613
may have the right to borrow up togbp50m at interest of six-monthLIBOR
plus 1.5 percentp.a.This is similar to a credit line, except that it cannot be
revoked during its life.A credit line is like a single, short-lived option on the preset spread, and the re-
volving commitment is like a series of such options (one expiring every six months,
for instance). These contracts are options, not forward contracts, because the bene-
ficiary can always borrow elsewhere if the market-required spread drops. The credit
line and the revolving commitment differ from caps in the sense that the contract
imposes a ceiling on the spread, not on the interest rate.
Example 16.6
A company has the right to borrow at 1 percent aboveLIBOR. If the company’s credit
rating deteriorates, or if average spreads in the market increase, the 1 percent spread
has become a bargain relative to what would have to be paid on new borrowing,
and the credit will be effectively used. If, on the other hand, the company’s rating
improves, or if average spreads in the market fall, the 1 percent spread may be very
high.
If the company uses the credit line, it still has to pay the agreed-upon 1 percent
spread. However, the company can also borrow elsewhere, at a spread that reflects
its better standing or the lower average spreads. Thus, the company has a cap
option on the 1 percent spread.
This finishes our review of international banking products. We now describe their
counterparts in the securities markets.
16.2 International Bond & Commercial-paper Markets
Almost simultaneously with the emergence of euromoney markets, firms and gov-
ernments started issuingusdbonds outside theus, and sold the bonds to non-us
residents. Such a bond was called a euro-dollar bond. As of the sixties, and partic-
ularly in the seventies, some eurobonds were denominated also in currencies other
than theusd. Even though the dollar has long preserved its dominant market share,
the fraction of dollar-denominated bonds occasionally drops below the total for Eu-
ropean currencies, nowadays. Also in the seventies, corporations and governments
started issuing short-term paper, although this short-term eurocommercial paper
market did not really take off until the late eighties.
The markets to be discussed in this section are the tradable-security versions of
the banking products that we discussed in the preceding section. Table 16.3 matches
the eurobanking products with the closest equivalent in the eurosecurities markets.
You may want to check these correspondences as we proceed.