The Eurocurrency Market
• Although many of the most burdensome regulations and costs have been eased or abolished, the Eurocurrency market still exists. It will continue to exist as long as there are profitable opportunities to engage in offshore financial transactions. • Because of the ongoing erosion of domestic regulations, these cost and return differentials are much less significant today than they were in the past. As a consequence, the domestic money market and Eurocurrency market are now tightly integrated for most of the major currencies, effectively creating a single worldwide money market for each participating currency.
countries in which currencies of the other country are denominated in. In the Eurobond market, Eurobonds are issued directly by the final borrowers. —The Eurocurrency market enables investors to hold shortterm claims on commercial banks, which then act as intermediaries to transform these deposits into long-term claims on final borrowers.
It is the market having special rate structure
•
The most important characteristic of the Eurocurrency market is that loans are made on a floating-rate basis. Interest rates on loans to governments and their agencies, corporations, and nonprime banks are set at a fixed margin above LIBOR for the given period and currency chosen. At the end of each period, the interest for the next period is calculated at the same fixed margin over the new LIBOR. • In general, Eurocurrency spreads are narrower than domestic money market spreads .
The Eurocurrency Market
• The Eurobond and Eurocurrency markets are often confused with each other. —In the Eurobond market, Eurobonds are sold outside the
The Eurocurrency Market
• The dominant Eurocurrency remains the U.S. dollar, but the importance of the Eurodollar waxes and wanes with the strength of the U.S. dollar. With dollar weakness in the latter parts of both the 1970s and 1980s, other currencies particularly the Deutsche Mark and the Swiss franc increased in importance. Dollar strength in the 1990s again boosted the relative importance of the Eurodollar. The euro has now become an important currency for denominating Eurocurrency loans and Eurobonds.
The Eurocurrency Market
•
Note that the prefix Euro as used here has nothing to do with the currency known as the euro. • The Eurocurrency is a name given to those currencies outside their origin country. • The Eurocurrency market isn’t confined to the European financial centers. It is the off-shore financial market of all world. • Not only short-term loans but also medium-term or longterm loans are operated in the market.
The Eurocurrency Market
• These costs and restrictions includes:
—Reserve requirements that lower a bank’s earning asset base —Special charges and taxes levied on domestic banking
It has high degree of liberty.
• The maturity of a loan can vary from approximately 3-10 years. Lenders in this market are almost exclusively banks. In any single loan, there normally will be a number of participating banks that form a syndicate. The managers charge the borrower a once-and-for-all syndication fee of 0.25%-2% of the loan value, depending on the size and type of the loan.
It has high degree of liberty
• The Eurocurrency Market operates very freely, investors and raisers can move in or out freely, the margin, or spread between the lending bank’s cost of funds and the interest charged the borrower, varies a good deal among borrowers and is based on the borrower’s perceived riskiness. • The repayment period vary in accordance with the borrower’s n Market
Features of the Eurocurrency Market
—It is the capital market with the nature of super-nation or
without nationality. —It is a wholesale market. —It has high degree of liberty. —It is the market having special rate structure.
transactions —Requirements to lend money to certain borrowers at concessionary rates —Interest rate ceilings on deposits or loans —Rules or regulations that restrict competition among banks
Chap 12
International Financial Markets
International Financial Markets
• International financial markets are the places in which international financial transactions are taken place. These businesses include long-term and shortterm debts, transactions of forex and gold. • A Eurocurrency is a dollar or other freely convertible currency deposited in a bank outside its country of origin. • The Eurocurrency market, which is also called offshore financial market, consists of those banks, that is, Eurobanks that accept deposits and make loans in foreign currencies for the non-residents.