What is one of the attractions of the Eurobond market?
Multiple Choice
A) There are more stringent disclosure requirements than for domestic bond markets.
B) They offer higher interest rates on deposits.
C) There is no translation exposure.
D) There is regulatory control by the national government.
The correct answer and explanation is:
The correct answer is C) There is no translation exposure.
Eurobonds are bonds issued in a currency that is not the currency of the country in which they are issued. For example, a bond issued by a German company in U.S. dollars would be considered a Eurobond. One of the key attractions of the Eurobond market is that it eliminates the translation exposure that often arises in domestic bond markets. Translation exposure refers to the risk that the value of a bond or other financial asset will fluctuate due to changes in exchange rates when the asset is denominated in a foreign currency.
In Eurobond markets, the issue is typically made in a currency that is not tied to the local currency of the issuing country. This reduces the risks associated with currency fluctuations for both the issuer and the investor. Translation exposure is a concern when an investor holds bonds denominated in a foreign currency, as the value of the bond may fluctuate when converted back to the investor’s home currency. However, in the Eurobond market, if the bond is issued in a widely accepted currency, such as the U.S. dollar, the investor avoids this potential problem.
While other options in the question may seem appealing, they do not fully capture the specific attraction of the Eurobond market. For instance, Eurobonds typically do not have more stringent disclosure requirements compared to domestic bonds, and regulatory control by national governments is less of an issue since these bonds are often issued in international markets. The attraction of avoiding translation exposure is particularly important for international investors and issuers who are looking to reduce the risks associated with currency volatility.