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To: Berney who wrote (2964)	6/1/1998 10:20:00 AM
From: smolejv@gmx.net	Respond to of 11051

EURO special Eurospecial - Introduction This is an english translation of the article "capital market efficiency on the increase" by dr. Detlef Dettinger, published in Optionschein-magazin 06/98 pp 77-79. Translation DJ The political impulse, that lead to the monetary union, can without doubt be traced back to the - rather understandable - wish by French to break the monetary hold of Deutsche Bundesbank on Europe. The German condition of acceptance however was to base the EZB (european central bank) on the principles promulgated by the same Bundesbank, which is what eventually happened. The institutional conditions for a strict policy of monetary stability were created. The big chances, which a functioning monetary union can offer, are clear and are not disputed even by its opponents. Let's just mention three of a number of points: a) there's no more exchange rate risks and subsequent costs among the participant countries b) intensity of competition is increased because of improved transparency of the market c) the volatiliy of US$ and Y exchange rates decreases - at least in middle term, after the period of transition is over and the markets get an idea of the fair values of the three major currencies. On the other side the EMU (european monetary union) is exposed to a political risk. Even if the improvements in the fiscal policies in the past years can not be underestimated, there's no way - especially in a democratic environment - to prescribe macroeconomical self-discipline. This also means that in case of economic divergencies additional steps in the direction of political union may become necessary. ...end of part I

To: Berney who wrote (2964)	6/1/1998 10:23:00 AM
From: smolejv@gmx.net	Respond to of 11051

EURO special - Part II Eurospecial - More competitive markets It is nearly impossible to gauge the consequences for the European and German, as well as international capital markets. A lot depends on the credibility of the EZB and on the expectations of the market players. On the other hand some basic effects can already be predicted: 1. the markets will be deeper and wider - the liquidity increases 2. the transaction and information costs diminish Both points lead to an intensified competition and thus to increased efficiency of the market. It is true, that the monetary union means a push in this direction, which however is present worldwide anyway. Additional funds are flowing into the capital markets and especially the stock markets also because of private old-age insurance funds, which are increasingly important not only in Germany, but across the whole Europe. The pension fund managers will soon be among the most influential people in Europe. Further the individual opinion about the stock market (for instance with Dt Telekom's IPO of 18 BDM) has fundamentally changed. And last but not least low inflation and low nominal interest rates have made stock investments even more attractive. The increase in internal capital, which so far was locked into other investment vehicles, and the inflow of foreign capital in search of diversification will both ensure further increase in liquidity. What kind of potential this may mean, especially compared to USA, is evident from the following table: Population GNP as perc Perc world exports World (OECD) exports as %gnp USA 263,0 32,5 19,6 8,2 Japan 125,0 20,5 10,5 9,0 EU-15 370,0 38.3 20.9 10.2 Increased liquidity of the markets means also less volatile prices. Their function as the indicators of market conditions will much improve and their role of information and control carriers will get enhanced. To say it in simpler terms, they will reflect the wishes and expectations of the investors better. The increased possibilities of comparing the investments in Euroland will also lead to an intensified competition between the issuers and stock exchanges. Following the wishes of investors for instance the market conditions will become more transparent, the opening times will be extended. The product mix will be expanded and the margins of banks and issuers will get squeezed due to increased competition, which will also lead to decreased transaction costs and improved transparency, i.e. to the decrease of the information costs. All this will lead to a self-amplification of the "virtuous cycle" processes, which lead to an improved money and capital market efficiency. ...end of part II

To: Berney who wrote (2964)	6/1/1998 10:24:00 AM
From: smolejv@gmx.net	Respond to of 11051

Euro Special - Part III Eurospecial - the rising need for ratings Euro will leave big footprints in the bond markets. First the question, who and where will issue the new European benchmark, has not yet been answered. Another very important point is that the bonds change their risk profile in the new monetary space. The exchange rate risks as the source of interest rate differences are of course gone. On the other hand the credit rating risks will among others come forward. The differences in case of government bonds should not be too big - 15 basis points can be expected at the most. This will lead to a search for outperformers, i.e. for better-than- government yields. The investors will concentrate on private emissions; their variety and inventiveness will follow the example of US example. On the other hand the demand will increase on the low-end-state side - just the same as in the US case. It does not make sense for the regional government to apply for a credit in a bank that has an inferior rating as the borrower itself. The need for ratings, transparency and investor relations management will increase. The state-level emissions will not any more automatically enjoy triple-A rating, because so far this was possible only because of ,soft budget restrictions". This means that national governments could use the money and exchange rate instruments to iron over their sloppy fiscal policies and thus always guarantee the repayments of their debts. The ,non-bail-out clause" of Maastricht treaty stopped this practice. The community does not guarantee the debts of the member states. Starting with the EMU all new emissions, due later than 1.1.2002, will be issued in Euro. Eurospecial - main beneficiary are the stock markets The bond market, however, will not be, compared to the stock market, relatively unattractive to an investor, looking for diversification, in view of the fact that risk profiles are converging. A study by the Centre for European economy research (EZW) shows that EMU will lead to increased proportion of equities and a corresponding decrease in bonds in the international investors' portfolios. Specially the markets of EMU-participants will profit from the expected international capital inflows. The diversification in the European markets will, however, not follow - as in the past - the state frontiers; it will much more take into account the branches. For instance the difference between DAX and CAC40 will matter less and the relative performance of (for instance) the car industry and insurance indeces will matter more for the simple reason, that the business cycle differences will have more impact than the differences between the participant state's economies. Eventually one can expect EMU to influence equity markets less than it will the bond markets. The heterogeneity of stock markets will remain. The technical switch-over is a different questions. All the German stock exchanges will start to operate in Euro on 4th January 1999. during the transition period extending to 1.1.2002 the dividends can be paid both in DM or in Euro. The minimum capital required is 50.000 Euro, and a single denomination one Euro or its multiple. The reevaluation of the stock value can happen three ways: capital stock-up from the company funds, a re- distribution of common stock or capital decrease. Capital stock-up means in this case no new inflows, because the free assets are converted into the common stock (passive exchange). This will be allowed by the laws, that will be enacted to regulate the Euro introduction. This step can then be followed by a stock split , for instance into 1-Euro-stock denominations. On top of that it is possible in Germany since 1.4. this year to issue stock without denomination. The only condition is that the basic unit of common stock corresponds nominally to "one Euro". This kind of a switch-over does not influence the market value of the company. It also means that both the stock price and derivatives, if any, do not need to adjust. ...end of part III

To: Berney who wrote (2964)	6/1/1998 10:25:00 AM
From: smolejv@gmx.net	Respond to of 11051

Euro Special - Part IV Eurospecial - derivatives in Euroland One of the most evident results of EMU is of course the emergence of a single money market. There will be just one euromoney rate curve for anything between one day and two years, as well as new reference interest rates, for instance an EURIBOR. The confluence of interest rates in Europe, however, will cause a number of options to disappear, because of the disappearance of differences in interest rates, exchange rates etc, i.e. all the points that mark an inefficient market and a call for arbitrage. A number of exchange rate and interest rate options will get the rug yanked from under their feet. The importance of different instruments, specially of interest futures, options and swaps, compared to the equity market is evident from the following table: Open interest EOY in BUS$ Yly growth Products 1993 1995 1996 1993 - 1996 Regulated market: Interest rate futures 4.959 5.863 5.931 20 Interest rate options 2.362 2.742 3.278 39 Exchange rate futures 35 38 50 45 Exchange rate options 76 43 47 -38 Stock index futures 110 172 199 81 Stock options 230 329 380 66 Reg. market (total) 7.771 9.188 9.885 27 OTC: Interest rate swaps 6.177 12.811 19.171 210 Exchange rate swaps 900 1.197 1.560 73 Other swap products 1.398 3.705 4.723 238 OTC (total) 8.475 17.713 25.453 200 New possibilities however are opening up in "Pan-European-Equity derivatives". DTB (Deutsche Termin B”rse - i.e. the German equivalent of CBOE) has compared to MATIF (French derivatives market) the advantage that the percentage of equity options is bigger. In any case one can expect an increase in the number and flavor of derivatives, stemming from the new products in the bond market. New products will be created, or gain in importance, for instance the credit rating swaps, which will for instance allow a separate risk management for loan defaults. The institution giving the loan can thus limit its risk. A big potential is seen also in spread derivatives. In case the volume of these products grows and the regulatory problems, which are still opened, are solved, then the banks could issue loans and at the same time buy a loan derivative, with the loan taker taking over the cost of the derivative. This way a much more efficient way of handling default risks is made possible. The biggest-so-far derivative market, the London LIFFE, tries to neutralize the growing dominance of DTB with the introduction of a new swaps benchmark. However it looks as if the abstinence of UK from the monetary union causes insurmountable difficulties, which for instance caused Chase Manhattan and Salomon Smith Barney, two market heavyweights from US, to announce they are moving the interest rate business from LIFFE to DTB. This would mean that LIFFE would slowly but surely lose its dominance in the short-term market. While the battle of the derivative markets for the customer is still undecided, the increase of the importance of the OTC, because of its greater flexibility, is not questionable any more (see table) . ... end of part IV

To: Berney who wrote (2964)	6/1/1998 10:26:00 AM
From: smolejv@gmx.net	Read Replies (2) \| Respond to of 11051

Euro Special - part V and end Eurospecial - Euro in international context As much as the battle for the customers between different markets is still open, so is the future role of European currency in the triad US Dollar, Yen and Euro. One thing is very probable: the external stability of Euro will be less politicized, because the Export trade of Euroland is not very much higher compared to US. Thus Euro will be less volatile, for instance less than DM is today. The reevaluations of single European currencies, which would have no fundamental justification, -which have for instance in the past time and again hit the DM -, will become less probable (and within EMU naturally impossible). The increased width, depth and liquidity of European capital markets will attract international - especially US - investment. The big US insurance companies have already stocked up their European research offices. The amount of these inflows, however, is uncertain, because it depends on the attractiveness of European markets and thus also on the development of the Euro-Yen and Euro-US$ exchange rate. The IFO- institute gauges the order of magnitude for these capital inflows to 600 to 800 BUS$. The inflows practically mean an upward pressure on the Euro. However because one of the preconditions for the successful start of the monetary union is also an accurate estimate of the fair value of the three big currencies, one can not, initially at least, exclude some strong volatility in the exchange rates. It is clear, however, that the importance of US dollar will decrease relative to Euro. This however will be a long-term process ... end of article