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    Euro Currency Markets: Financial Management

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    jerly thomas
    Eurocurrency markets involve the borrowing and lending of funds in currencies other than those of the country in which the transaction occurs. They originated in the 1950s as banks in Europe and Canada used dollar funds to finance trade and investment projects. Both supply factors like foreign currency holdings and demand factors such as restrictions on domestic banking drove the growth of these markets. Eurobanks accept deposits and issue longer-term loans at interest rates tied to benchmarks like LIBOR plus a margin. These markets allow circumvention of some domestic banking policies and offer higher rates on deposits.

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    Euro Currency Markets: Financial Management

    Uploaded by

    jerly thomas
    145 views3 pages
    Eurocurrency markets involve the borrowing and lending of funds in currencies other than those of the country in which the transaction occurs. They originated in the 1950s as banks in Europe and Canada used dollar funds to finance trade and investment projects. Both supply factors like foreign currency holdings and demand factors such as restrictions on domestic banking drove the growth of these markets. Eurobanks accept deposits and issue longer-term loans at interest rates tied to benchmarks like LIBOR plus a margin. These markets allow circumvention of some domestic banking policies and offer higher rates on deposits.

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    EUROCURRENCY MARKETS

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    Eurocurrency markets involve the borrowing and lending of funds in currencies other than those of the country in which the transaction occurs. They originated in the 1950s as banks in Europe and Canada used dollar funds to finance trade and investment projects. Both supply factors like foreign currency holdings and demand factors such as restrictions on domestic banking drove the growth of these markets. Eurobanks accept deposits and issue longer-term loans at interest rates tied to benchmarks like LIBOR plus a margin. These markets allow circumvention of some domestic banking policies and offer higher rates on deposits.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    145 views3 pages

    Euro Currency Markets: Financial Management

    Uploaded by

    jerly thomas
    Eurocurrency markets involve the borrowing and lending of funds in currencies other than those of the country in which the transaction occurs. They originated in the 1950s as banks in Europe and Canada used dollar funds to finance trade and investment projects. Both supply factors like foreign currency holdings and demand factors such as restrictions on domestic banking drove the growth of these markets. Eurobanks accept deposits and issue longer-term loans at interest rates tied to benchmarks like LIBOR plus a margin. These markets allow circumvention of some domestic banking policies and offer higher rates on deposits.

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    EURO CURRENCY

    MARKETS

    FINANCIAL MANAGEMENT
    CIA II ASSIGNMENT
    EUROCURRENCY MARKETS

    A eurocurrency is a foreign-currency-denominated deposit in a bank outside the country where the


    currency is issued as a legal tender.

    A Eurobank (or offshore bank) is a financial intermediary that simultaneously bids for time deposits
    and makes loans in a currency , or currencies, other than that of the country in which it is located.

    Eurocurrency markets are markets for both deposits and loans in a currency, or currencies, other than
    that of the country in which they are located.

    CHARACTERISTICS OF EUROCURRENCY MARKETS

    Þ location of market not ownership of financial institution or funds

    Þ markets for both loans and deposits in foreign currency

    ORIGIN OF EUROCURRENCY MARKETS

     Markets originated in mid-1950s when banks in Europe and Canada decided to use their
    funds in $ to finance trade and investment projects

     Eurobanks could circumvent domestic policies and regulations, which made the business
    more attractive

     Both supply and demand factors helped the growth of the eurocurrency markets

     Supply factors:

    Þ U.S. $ were held by Europeans for transactions in commodities and metals, for hedging
    purposes and as a store of value

    Þ Russians and Eastern Europeans were reluctant to keep their $ in the U.S.

    Þ Relaxation of exchange controls in Europe in 1958 and external convertibility of £

     Demand factors:

    Þ After the use of the £ was banned for financing foreign trade, British merchant banks
    offered overseas loans in $

    Þ Eurobanks were able to offer higher rates on $ deposits than the rates that domestic U.S.
    banks could offer due to restrictions from regulation Q
    DEPOSITS AND LOANS IN EUROCURRENCY MARKETS

     Eurobanks accept deposits and issue loans

     Loans, known as eurocredits, are longer-term and, thus, carry higher risk of default

     Eurobanks charge higher spreads on their loans

     Eurobanks practice rollover pricing

     A loan extended through rollover involves a succession of short-term loans that are
    periodically rolled over at a different interest rate

     Interest rate is fixed for each period and updated at beginning of next period

     Interest rate is given by

    i(t) = r(t) + lending margin

    where r(t) is reference rate (e.g. LIBOR) and lending margin depends on borrower’s credit
    quality

     Lending margin can be fixed or floating

     Two types of eurocredits

    Þ Term credit

    · Given time for principal to become gradually available

    · Grace period for full loan amount

    · Schedule of repayments of principal

    · Interest paid at given times, usually on rollover basis

    Þ Revolving credit

     Eurocurrency time deposits have various maturities

     Spot next; spot week; spot fortnight

     “Overnight” deposits

     Eurocurrency and domestic deposits are close, but not perfect substitutes

     Eurocurrencies face exchange or capital controls

     Eurobanks offer higher rates to attract deposits, but rates move closely with domestic
    interbank rates

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