Presented ByBhavna 16070Harmeet Kaur Trehan 16067

EURO CURRENCY MARKETThe Eurocurrency market is the market for deposits placed under a regulatory regime different than the regulations applied to the deposits used to execute domestic transactions. The money market for borrowing and lending currencies that are held in the form of deposits in banks located outside the countries in which those currencies are issued as legal tender. Eurodollar: A dollar-denominated deposit in a bank outside the United States or at International Banking Facilities (IBFs) in the United States.

What is Eurocurrency?Eurocurrency is the term used to describe deposits residing in banks that are located outside the borders of the country that issues the currency the deposit is denominated in. For example: a deposit denominated in US dollars residing in a Japanese bank is a Eurocurrency deposit, or more specifically a Eurodollar deposit.

Any freely convertible currency, such as $, or , Yen deposited in a bank outside its country of origin. It is the residency of the bank and not its nationality that determines the euro nature of the deposit. The most important international financial markets today. Composed of euro banks who accept/maintain deposits of foreign currency Dominant currency: US$

WHAT IS EURODOLLAR By Euro-dollars is meant all U.S. dollar deposits in banks outside the United States, including the foreign branches of U.S. banks. A Euro-dollar is, however, not a special type of dollar. It bears the same exchange rate as an ordinary U.S. dollar has in terms of other currencies. Euro-dollar transactions are conducted by banks not resident in the United States. For instance, when an American citizen deposits (lends) his funds with a U.S. Bank in London, which may again be used to make advances to a business enterprise in the U.S., then such transactions are referred to as Euro-dollar transactions

The Euro-dollar market has two facets: It is a market which accepts dollar deposits from the non-banking public and gives credit in dollars to the needy non-banking public.It is an inter-bank market in which the commercial banks can adjust their foreign currency position through inter-bank lending and borrowing.

How it Originated?After the Second World War, the amount of U.S. dollars outside the United States increased enormously.

As a result, enormous sums of U.S. dollars were in custody of foreign banks outside the United States.

During the Cold War period, especially after the invasion of Hungary in 1956, the Soviet Union feared that its deposits in North American banks would be frozen as a retaliation.

It decided to move some of its holdings to the Moscow Narodny Bank, a Soviet-owned bank with a British charter.

The British bank would then deposit that money in the US banks. There would be no chance of confiscating that money, because it belonged to the British bank and not directly to the Soviets. On February 28 1957, the sum of $800,000 was transferred, creating the first eurodollars.

Gradually, as a result of the successive commercial deficits of the United States, the eurodollar market expanded worldwide.

Thus, the currencies involved in the Eurodollar market are in no way different from currencies deposited with banks in the home country. It is only that Eurodollar is not under the orbit or surveillance of the monetary policy, where the currency in their home country is under the regulation of the national monetary policy

Effects of Eurodollar MarketEurodollars are not spendable money, but are money substitutes such as time deposits in a bank.In countries without efficient money markets, access to a competitive Eurodollar market may reduce the demand for domestic money as residents shift funds to the offshore market and earn profit.If the Eurodollar market encourages more international capital flows, then central banks need to engage in more sterilization operations to achieve their domestic monetary policy.

Features of Eurocurrency MarketIt is an international market and it is under no national control: It has come up as the most important channel for mobilizing and deploying funds on an international scale.It is a short term money market:Eurodollar markets are the time-deposit market. The deposits here have a maturity period ranging one day to several months. Eurodollar is the short-term deposit. It is a wholesale market:It is so because Eurodollar is the currency that is dealt in only large units. Size of individual transaction is usually above $1million.

4.The Euro-Currency market can be broadly divided into 4 components: (i) Euro-Currency deposit market involving short term deposits. (ii) Euro-Currency loan market (Euro-credits) involving syndicated loans. (iii) Euro-Bond market in which Corporate entities issue debt instruments to raise resources from investors through banks operating as underwriters. (iv) Euro-Notes market in which international borrowers raise resources directly from the investors without using banks as intermediaries or any underwriting support.

5. It is highly competitive and sensible market: High competitive: This market is characterized as highly competitive because the market is growing and accepted internationally.

Sensible: The Eurodollar market is said to be sensible because it responds faster to the changes in demand and supply of the funds and also reacts to changes in the interest rates.

6. Euro-Currency market is distinct from the foreign exchange market. It is a market for deposits and for loans between banks and between banks and their customers. It is a market in which foreign currencies are lent and borrowed whereas in the foreign exchange market, foreign currencies are bought and sold. This market therefore converts short term deposit resources into short and medium term loans for financing projects.

7. Due to absence of regulation, deposits in this market are unsecured. Due to this deposits are received only on short term basis (max: one year) whereas loans are demanded on medium to long term basis. This creates an asset-liability mismatch which results in Euro-banks being exposed to both liquidity and interest rate risks.

TRANSACTIONSIllustration German firm sells medical equipment to institutional buyer in the US. It receives a US$ check drawn on Citicorp, NY. Initially this check is deposited in a checking account for dollar working capital use. But to earn a higher return (or rate of interest) on the $ 1 million the German firm decides to place the funds in a time deposit with a bank in London, UK.

One million Eurodollars have thus been created by substituting a dollar account in a London bank for the dollar account held in NY. Notice that no US $ left NY but ownership of the US deposit has moved from a foreign corporation to a foreign bank. The London bank would not like to leave the funds idle in NY account. If a government or commercial borrower is unavailable, the London bank will place the $ 1 million in the London interbank market. The interest rate at which such interbank loans are made is called the London interbank offer rate (LIBOR).

This example demonstrates that the Eurocurrency market is a chain of deposits and a chain of borrowers and lenders. The majority of Eurocurrency transactions involve transferring control of deposits from one Eurobank to another Eurobank. Loans to non-Eurobank borrowers account for less than half of all Eurocurrency loans.

FACTORS CONTRIBUTING TO THEGROWTH OF EURO MARKETRelaxation of exchange control and resumption of currency convertibility.The general relaxation of exchange control , the stability of the exchange market and the redemption of the currency convertibility in western Europe in 1958 provided an added impetus to the growth of the euro market .The political factors The cold war between the United states and the communist countries also contributed to the euro currencymarket.

The regulation of Q Regulation of Q which fixed the maximum rate of interest payable to the banks in US and the prohibition of payment of interest on deposit for less than 30 days very significantly contributed to the fast growth of the euro market

Balance of payment deficit of the US Deficit in the balance of payment in US meant an increasing flow of US dollar to those countries which had a surplus with the US

Innovative banking The advent of the Innovative banking ,spearheaded by the US banks in Europe and the willingness of the banks in the market to operate on a narrow basis also encouraged the growth of euro market.Supply of petrodollars The flow of petro dollar facilitated by the increase in the OPECS oil revenue following by the oil price hike since 1973 has been a significant source of growth of Euro currency.

Participants in Eurocurrency MarketGovernmentInternational OrganizationsCentral BanksCommercial BanksCorporationsMNCTradersIndividuals

Participants have contributed in the demand and supply of the fund, in the following way:Supply:Central Banks of various countries are the suppliers; they channel the fund through BIS.Increase in the Oil Revenue of the OPEC has added to the fund.MNCs and the traders place their surplus funds for the short-term gains.Demand:Government demand for these funds to meet the deficit arising due to meet the deficit arising due to the deficit in Balance of Payment and the rise in the oil prices.Commercial Banks needs extra fund for lending.Some also borrow for the better window dressing in the year-end.

AdvantagesIt helped the economies to solve the liquidity problems:It provided better investment opportunities.Funds are also by the commercial banks of various countries for domestic credit creation and window dressing.This facilitated the growth and development of various countries like Brazil, South Korea, Taiwan, and Mexico etcIts International acceptance has helped in the international trade to expand and accelerated the process of globalization.

It has provided a truly international short-term capital market, owing to a high degree of mobility of the Euro- dollars. Euro-dollars are useful the financing of foreign trade. It has enabled the financial institutions to have greater flexibility in adjusting their cash and liquidity positions.It has enabled importers and exporters to borrow dollars for financing trade, at cheaper rates than otherwise obtainable.

It has helped in reducing the profit margins between deposit rates and lending rates. It has enhanced the quantum of funds available for arbitrage. It has enabled monetary authorities with inadequate reserves to increase their reserves by borrowing Euro-dollar deposits. It has enlarged the facilities available for short- term investment. It has caused the levels of national interest rates more akin to international influences.

DisadvantagesFor many economies it is a new concept.

For many economies also considered that the speed of its growth or expansion is TOO fast.

For many economies, they feel this market gives a chance to avoid many a regulations that they try to impose on their national money market.

It may lead banks and business firms to over-trade. It may weaken discipline within the banking communities. It involves a grave danger of sudden large-scale withdrawal of credits to a country. It has rendered official monetary policies less effective for the countries involved.

REFERENCEShttp://www.bnet.fordham.edu/goswami/FNGB7451ch13%5B1%5D.pdfhttp://web.stanford.edu/class/msande247s/2008/sixth week posting/ch09 .pdfhttps://www.princeton.edu/~ies/IES_Essays/E125.pdfhttp://exporters-sources.com/eurocurrency-market-characteristics/http://www.bms.co.in/what-are-the-characterisitics-of-euro-currency-market/