Presentation By-{Group-2}Mohammed tambawalaSai sumanthJitendra kalwani

Euro Currency Market and its Instruments

WHAT IS EURO CURRENCY?

Euro Currency-

Any currency banked outside its country of origin.

Example-

US dollar banked in England

Euro bank-

Banks that accepts deposits and make loans in foreign countries

Example -

Euro Currency Bank at Frankfurt franc

EURO CURRENCY DEPOSIT

- A deposit in the relevant currency with a bank outside the home

country of that currency.

- A US dollar deposit with a bank in London is a Euro Dollar deposit, a

Sterling deposit with a bank in Luxembourg is a Euro Sterling deposit.

- A Eurodollar Loan is a dollar loan made by a bank outside the US to a

customer or another bank.

Note- ….(Location of the bank matters, neither the ownership of the bank

nor the ownership of the deposit)

EURO CURRENCY MARKETS

The international currency markets, also known as offshore

markets where currencies are borrowed and lent.

Dollar deposits outside USA or sterling deposits outside UK are

called offshore funds and have a market, so long as they are

convertible and readily usable in international transactions.

Euro Currency Market….

Convertible currency is defined as one, which is widely, accepted

international payments and whose country does not have Current

account controls under Article VIII of the I.M.F. Agreements.

Thus Euro-currency market is a market principally located in Europe

for lending and borrowing the Worlds most important convertible

currencies, namely Dollar, Sterling, French franc, yen, etc.

EURO CURRENCY MARKETS

The European Currency Market is an external banking system that runs

parallel to the domestic banking system of the country that issued the

currency

In US, the banks are subject to the Federal reserve Regulation specifying

reserve requirements on bank time deposits. The reduced cost structure

has led to the growth of the euro-currency and euro dollar market.

The Eurocurrency market operates at the interbank/ and or wholesale

level.

Factors for its emergence….Strict rules in the domestic market

Lack of Govt. controls on credit allocation

& interest rates.

No taxes and prior commitments

No need to maintain Reserve Requirement

Operates on the basis of market forces

Low operating margins, high turnovers

Its Characteristics……

International Money market free from govt.

regulations

Exist as a savings and time deposit

Exists for short term which makes difficult to

manage risk

Participants- Govt., Public Sector

Organizations

Euro dollar market dominates other

currencies

EURO CURRENCY CENTERS

Currencies Country

Austrian Schilling Austria

Belgian Franc Belgium

Dutch Guilder Netherlands

Finnish Markka Finland

French Franc France

German Mark Germany

Irish Punt Ireland

Italian Lira Italy

Luxembourg Franc Luxembourg

Portuguese Escudo Portugal

Spanish Peseta Spain

EURO CREDIT SYNDICATES

Eurocredits

Intermediate-term loans of Eurocurrencies made by banking syndicates to corporate and

government borrowers.

Eurocredit market

Comprises banks that accept deposits and provide loans in large denominations and in a

variety of currencies.

The banks that constitute this market are the same banks that constitute the

Eurocurrency market; the difference is that Euro Credit loans are longer-term than so-

called Eurocurrency loans.

Although the Eurocurrency market focuses on large-volume transactions, there are times

when no single bank is willing to lend the needed amount.

A syndicate of Euro banks may then be composed to underwrite the loans. Front-end

management and commitment fees are usually charged for such syndicated

Eurocurrency loans.

DEPOSITORY RECEIPTS

A negotiable financial instrument issued by a bank to

represent a foreign company's publicly traded

securities. The depositary receipt trades on a local stock

exchange.

Depositary receipts make it easier to buy shares in

foreign companies because the shares of the company

don't have to leave the home state.

OUTRIGHT FORWARDS

An outright forward transaction, like a spot transaction, is a straight forward

single purchase/ sale of one currency for another.

There is a specific exchange rate for each forward maturity of a currency,

almost always different from the spot rate. The exchange rate at which the

outright forward transaction is executed is fixed at the outset.

Outright forwards in major currencies are available over-the-counter from

dealers for standard contract periods or “straight dates” (one, two, three, six,

and twelve months); dealers tend to deal with each other on straight dates.

Role of the Offshore Deposit Markets for Euro-Dollars and Other Currencies

With large and liquid offshore deposit markets in operation, and with information

transfers greatly improved and accelerated, it became much easier and quicker to detect

any significant deviations from covered interest rate parity, and to take advantage of any

such arbitrage opportunities.

These deposits trade over the telephone like foreign exchange, with a bid/offer spread,

and they have similar settlement dates and other trading conventions. Many of the same

counterparties participate in both markets, and credit risks are similar.

For currencies not traded in the offshore Eurocurrency deposit markets in London and

elsewhere, deposits in domestic money markets may provide a channel for arbitraging

the forward exchange rate and interest rate differentials

NON DELIVERABLE FORWARDS

In recent years, markets have developed for some currencies in “non-deliverable

forwards.” This instrument is in concept similar to an outright forward, except that there

is no physical delivery or transfer of the local currency.

Rather, the agreement calls for settlement of the net amount in dollars or other major

transaction currency.

NDFs can thus be arranged offshore without the need for access to the local currency

markets, and they broaden hedging opportunities against exchange rate risk in some

currencies otherwise considered unhedgeable.

Use of NDFs with respect to certain currencies in Asia and elsewhere is growing rapidly.

EURO DEPOSITS The Euro currency market has its origins in time deposits - whereby cash was held in a

banking system outside the country of that currency’s origin.

Euro time deposits generally range from 7 days to 6 months. Banks receiving

Eurocurrencies use them to make loans to international and supranational financial

institutions, governments, companies and to each other

The risks of holding euro-deposits are accentuated by the fact that, on average, euro-

deposits tend to have shorter maturities than euro-loans.

Euro-deposits are free from reserve requirements and most other national regulations, and

as their attractiveness for hedgers and speculators moves funds into the market, Central

Bank control of financial intermediaries declines.

EURO SECURITIES

As well as euro deposits, money market securities can be euro securities.

Such securities include:

- Euro commercial paper (ECP)

- Euro certificates of deposit (euro CD)  

- Euro notes 

- International repos

Whatever the instrument used, the issuer’s aims are similar:

-To widen the investor base beyond its domestic market,   

-To avoid the regulatory restrictions of its domestic market

AMERICAN DEPOSITORY RECIEPT-ADR

A negotiable certificate issued by a U.S. bank representing a specified

number of shares (or one share) in a foreign stock that is traded on a U.S.

exchange.

ADRs are denominated in U.S. dollars, with the underlying security held by

a U.S. financial institution overseas.

ADRs help to reduce administration and duty costs that would otherwise be

levied on each transaction.

ADR It is an excellent way to buy shares in a foreign company while realizing

any dividends and capital gains in U.S. dollars. However, ADRs do not

eliminate the currency and economic risks for the underlying shares in

another country. 

For example, dividend payments in Euros would be converted to U.S.

dollars, net of conversion expenses and foreign taxes and in

accordance with the deposit agreement. 

ADRs are listed on either the NYSE, AMEX or Nasdaq.

GLOBAL DEPOSITORY RECIEPT-GDR

A Global Depository Receipt or Global Depositary

Receipt (GDR) is a certificate issued by a depository bank, which

purchases shares of foreign companies and deposits it on the account.

GDRs represent ownership of an underlying number of shares.

Global Depository Receipts facilitate trade of shares, and are

commonly used to invest in companies from developing or emerging

markets.

GDRs……

Prices of GDRs are often close to values of related shares, but they are

traded & settled independently of the underlying share. Several

international banks issue GDRs, such as JPMorgan

Chase, Citigroup, Deutsche Bank, Bank of New York.

They trade on the International Order Book (IOB) of the London Stock

Exchange. Normally 1 GDR = 10 Shares, but not always.

A GDR is very similar to an American Depositary Receipt (ADR).

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