7/17/2019 EC market

http://slidepdf.com/reader/full/ec-market 1/6

EUROCURRENCY MARKET

Euro market is the market for international finance. Euro Dollar, Euro currency,

Euro equity, Euro Bond, Euro notes etc is a generic term used to explain currencies and

financial instruments transacted out side county of its issue. Euro dollar are dollarswhich are transacted b banks and !lobal firms outside U"A. It is major source of 

international finance and credit. It is a wholesale market for internationally accepted

hard currencies and financial instruments. The market in which orrowing and lending

in Euro instruments takes place is called the Eurocurrency market. #t has two sides ie

su$$l and demand for Euro currenc.

"u$$l of Euro currenc comes  from high net worth indi!iduals, gloal anks and

cash rich corporate houses They park their surplus funds in Euro currency market to

earn attracti!e return. %emand for Euro dollar comes from "loal anks, #$%s ,

"loal firms, and national go!ernments are the orrowers of Euro currency to meettheir short term foreign currency requirements Euro credit, Euro currency, Euroond &

Euro equities are the major components of Euro dollar market.

Ori!in of the term Euro currenc 

The term Euro currency had its origin from the term 'Eurodollar(. Traditionally )*D

was treated as the most stale currency. European In!estors, especially in!estors from

)**+ region used to keep their surplus funds in )* anks in Dollar terms. ence such

deposits were known Euro dollar deposits . -ith the outreak of cold war, Due to the

fear of loosing their assets, they mo!ed those deposits to Banks in European and sianfinancial centers. Thus Euro dollar market ecame Euro currency market

/urther, -ith the great depression of   01234s the dollar lost its significance as key

currency , and other European currencies such as pound sterling, 5en, Euro etc ecame

key currencies . Thus gloal in!estors got alternati!es. In!estors preferred to keep

deposits in other currencies and start depositing in other financial centers especially in

European Banks . The market ecame gloal and the. Euro dollar ecame Euro

currency.

  The prefix 'Euro( is now outdated ecause Euro currencies and other financialinstruments are regularly traded outside Europe, especially in *ingapore and ong

6ong, Tokyoetc . Thus, Euromarkets are also referred to as 'offshore( market if such

deposits ha!e more widespread geographical ase

Features of the Euro currency market:  07  #nternational Market& The Euro8

dollar market is a world wide market. This market accepts deposits in dollars and major 

currencies all o!er world and also ad!ances are gi!en in required currencies.97 'ree

of !o(ernment re!ulations: Euro currency is generally outside the direct control of 

any national go!ernment. $either the currency issuing country nor the host country has

any control o!er Euro currency. 27 "hort)term 'unds& The maturity nature of such orrowing and landings are as short as one day to six months. ;7 Close maturit of 

7/17/2019 EC market

http://slidepdf.com/reader/full/ec-market 2/6

assets and liabilities& There is a close matching of the maturity structure of assets

<loans7 and liailities <deposits7.This minimi=es the risk associated with interest rate

fluctuations. >7 *holesale market: Eurocurrency market is a wholesale market. The

minimum si=e of indi!idual transaction is ao!e ? 0 million @7 #nter)+ank 

$artici$ation& It is mainly an inter8ank market in which the Euro anks orrow andlend from each other. 

ECONOM#C #M,ACT O' EUROCURRENCY MARKET 

07 The Eurocurrency market facilities short)term ca$ital flows.

97.  No control on euro currenc and euro instruments. The national monetaryauthorities ha!e no control on such currencies and instruments and this make monetary

 policy ineffecti!e

27 Euro instruments hel$s to im$ro(e !lobal -iuidit   *ince the Eurocurrency

market can e a source of international  liquidity. ence it contriute to inflationarytendencies in the world economy.

  ;7 The Eurocurrenc market source of credit  for the nations facing BA deficitnations. The Eurocurrency market helps the central anks to postpone the needed BAadjustment measures.

>7 #n(estment A(enue  Euro currency market is a profitale in!estment a!enue for thelarge corporate & commercial anks to deploy their surplus fund.

 @/ It is a source of finance for e0$orters and im$orters.

1/ Eurocurrency market is a source of finance the economic de(elo$ment $ro!ramof many emerging markets economies

2uestion& Explain the meaning and features of Eurocurrency market. < CC Imp7

 Reasons for the growth of Euro currency market.

U" dollar as a ke currenc: The main reason for the growth of Eurocurrency market

was the special status of the )* dollar as a key or !ehicle currency. Because of this

special role of the dollar as a key currency, foreign indi!iduals, corporations and

go!ernments preferred to hold dollar alances.

3u!e demand for Ke currencies& The growth in the !olume of international trade

has created a huge liquidity gap. The euro currency market was the final solution to the

liquidity prolem. Because of this special role of the dollar as a key currency, foreign

indi!iduals, corporations and go!ernments preferred to hold dollar alances.

Out break of Cold *ar&  In the 01>3s *o!iet )nion was earning dollars from the

export of gold and raw materials. They considered )* as a safe hea!en to park their 

funds. -ith the out reak of cold war in 01>3s , *o!iet )nion and East European

nations to shift their dollar deposits from merica to Euro anks for fear that they

might e locked y the merican "o!ernment, in case of a war 

7/17/2019 EC market

http://slidepdf.com/reader/full/ec-market 3/6

'low of U" Aid& fter 9nd world war , )* was emerged as the most powerful nation .

They ad!anced huge sums of money on the rehailitation of Europe, leading to the

transfer of a large sum of dollars to European anks.

+O, %eficits in U". 4 Re!ulation 2: *ince 01@2, the )* followed tight money

 policy and other anking regulations to deal with their financial prolem. s such

regulations were not applicale to offshore anks, merican anks set up susidiaries

aroad and mo!ed funds outside to escape regulations.

#nterest euali5ation Ta0& During 01@3s, European nations were accumulating dollar 

resources y Issuing onds in )* markets and therey huge out flow of dollar. To deal

with the crises, )* introduced a tax called interest equali=ation tax . The European

 orrowers had to turn to other alternati!e source < Euro currency market7 for dollar

,etro) dollar de$osits b O,EC Countries: The "ulf oom and susequent increase

in the oil prices since 012 has resulted in the huge accumulation of dollar y AE%countries , popularly known as etro Dollar. They were deposited outside "ulf region

especially in Euro anks.

Con(enience in holdin! balances abroad: International corporations often found it

!ery con!enient to hold alances aroad for short periods in the country in which they

needed to make payments.

O(ercome %omestic Credit Restrictions: n important reason for the growth of the

Eurocurrency market is that, the international corporations can o!ercome domestic

credit restrictions y orrowing in the Eurocurrency market.

#ntroduction of Ca$ital account con(ertibilit: The introduction of currency

con!ertiility in late nineties & relaxation of exchange controls y many nations,

 pro!ided a fresh support and free mo!ement of Euro currencies across the world.

 Question :  Discuss the reasons for the growth of Eurocurrency market . < CC Imp7

"E6MENT" O' EURO)CURRENCY MARKET8

Euro currency market has een di!ersifying during the past three decades into a numer 

of su8markets, such as the euro ond market, euro equity market, sia8 dollar market

and so on

Time de$osits&  large part of money in the Euro currency market held in fixed8ratetime deposits.

Certificates of de$osits& nother important instrument is the Eurocurrency certificatesof deposits . %Ds are issued y anks to raise funds large denominations

Eurodollar floatin! rate C%s and Eurodollar floatin! rate notes& They help tostaili=e the principal !alue of the paper.

7/17/2019 EC market

http://slidepdf.com/reader/full/ec-market 4/6

Euro credit and Euro notes: #ajor part of the lending in Euro currency

market is in the form of Euro credit.8 Euro credits are short and medium term loans to

gloal corporate, #ultinational companies and national go!ernments. Euro8credits

 elong to wholesales sector of the International %apital market and normally in!ol!e

large amounts. Euro8credits are issued mostly without any collateral security. It is amajor source of credit in foreign currencies.

EURO)+ON%":

The Euro ond market is the International capital market Into which a large ount of 

long term capital has een channeled internationally. International ond Issues are not

new. They ho!e een in existence since the early 01Ih century. During the 01 th century

ury, many ).*. loans were Issued In Europe In terms of dollars. In Fiose days Issuing

expertise was pro!ided y the experienced anks and there was no go!ernment

restrictions on kitematlonal capital mo!ements, Exc the experiei6cu #umw was!irtually unknown and the capital lending countries had no BA prolems.

The Euro8onds are a special type of lower cost International onds. They are long8

term det securities that are sold outside the orrower4s country to raise long8term

funds in a currency other than the currency of the county where the onds are sold.. /or 

example, an )* corporation selling onds in Gondon denominated in Euro or )*

dollars. The Euro8onds are sold for International orrowers in se!eral countries

simultaneously y the International group of anks, in the currencies of the countries

where they are issued.

I. Euro8onds ore those delierately offered for sole in more thon one country

simultaneously through International syndicate of underwriting ig and selling anks.

-hil some foreign onds may e ought y residents of se!eral countries usually they

ore intended for sale into in!estors in host nation. The )s dollar has een the most

 popular denomination currency for con!entional Euro8onds.

*ome euro8onds ha!e important equity options. )nder this category the ond holder 

otains the enefit or right of con!erting onds into equity.

7/ The are the main source of funds in Euro currenc markets .. There are differenttypes of Euro8onds such as straight or fixed rate onds, Deep discount onds, Hero

coupon onds, %on!ertile onds, and %urrency option onds etc.

97 Eurobonds are different from forei!n bonds . /oreign onds refer simply onds

sold in a foreign country ut denominated in the currency of the country in which the

 onds are eing sold. Euroonds are usuall unsecured, that is, they do not require

collateral, while domestic onds are secured. "horter maturities than the domestic

bonds. large majority of Euroonds are of fi!e year maturities. The annual coupon on

Euro con!ertile ond is normally lower than other onds.

7/17/2019 EC market

http://slidepdf.com/reader/full/ec-market 5/6

27 The carr ,ut and Call O$tions: The issuing company has a right of call option,

that is, an issuing company can uy ack the onds y gi!ing a notice of its intension to

 uy. The in(estor has a $ut o$tion, that is the ond holder can sell the onds ack to

the issuer.

;7 The leadin! centers in the Eurobond market are Gondon, /rankfurt, $ew 5ork 

and Tokyo.

EURO E2U#TY& 

In recent years reputed Domestic firms raise long funds y issuing equities in home

country and foreign markets . Euro equity issue refers to a process wherey a company

raises funds through the sale of equities using "loal Depository +eceipts <"D+7 as a

financial instrument. They are denominated in currencies other than the home

currency of the issuing company.

It is an important source of international finance for !loball re$uted firms.  Euro

equity is issued simultaneously in !arious financial markets. They are issued in more

than an one foreign market, except in the domestic market

Through euro equity, reputed firms collect foreign funds for their gloal operations. The

issues are managed y a consortium of in!estment anks. They are also listed in

leading stock exchanges of the world . Ance issued, euro8equities are listed at least on

the computer screen quoting system of the International *tock Exchange <I*E7 in

Gondon.

unit of "D+ represents one or more shares of a sponsored or issuing company. They

are proportionally priced and issued to gloal in!estors. The issuing company deposits

an equal amount of its shares with the depository ank. The depository anks then sell

the Euro equities through depository receipts.

 The in!estor does not get the possession of shares ut only the depository receipts.

"D+s holders ha!e no !oting rights unless "D+s are con!erted to shares.

Raisin! funds throu!h euro euit in(ol(es the followin!

"$onsor or #ssuin! Com$an  :: It is the company which desires to raise capital

through euro8equities.

%e$ositor +ank :: It prepares and issues "D+s against the deposited original shares of 

the company. It also appoints a local custodian. It is responsile for issuing and

cancelling of "D+s.

#n(estment +ankers: They form the syndicate of participating anks. elp in

completing all the technical and issue requirements.

7/17/2019 EC market

http://slidepdf.com/reader/full/ec-market 6/6

Custodian& It holds the underlying ordinary shares of "D+s. It works as a local agent

for depository ank.

The im$ortant stock e0chan!es which deal in 6%Rs are &  <07 Gondon *tock 

Exchange <97 Guxemourg *tock Exchange <27 Duai International /inancial Exchange

and <;7 ong 6ong *tock Exchange.

Indian companies which are listed and ha!e a consistent track record of past three years

can market euro equity through "D+s. This requirement was relaxed for raising ftmds

for infrastructure projects.

2uestions: -rite notes on Euro credit ,Euro onds& Euro equity <*egments of Euro currency #arket 7