Welcome to Scribd, the world's digital library. Read, publish, and share books and documents. See more
Standard view
Full view
of .
Look up keyword
Like this
0 of .
Results for:
No results containing your search query
P. 1
Lesson 15 the Eurocurrency Market

Lesson 15 the Eurocurrency Market

Ratings: (0)|Views: 4,301|Likes:
Published by jitinwadhwani

More info:

Categories:Topics, Art & Design
Published by: jitinwadhwani on Jan 25, 2010
Copyright:Attribution Non-commercial


Read on Scribd mobile: iPhone, iPad and Android.
download as DOC, PDF, TXT or read online from Scribd
See more
See less





Lesson 15 The Eurocurrency Market
Teaching Points:
1. the definition of Eurocurrency2. the basic characteristics of the Eurocurrency market3. the origin of the Eurocurrency market4. the reasons for the development of Eurocurrency market5. the reasons for interest rate differences that exist between the Euromarket and the domesticmarket6. how interest rates are quoted and charged under different situations
II. Teaching Aim:
1. Understand the definition of Eurocurrency and the basic characteristics of the market2. Understand the origin of the market and the reasons for its development3. Understand the reasons for interest rate differences that exist between the Euromarket and thedomestic market4. Understand how interest rates are quoted and charged under different situations
III. Teaching Periods:
Totally 12 teaching hours
IV. Teaching Process1. Background Knowledge 
The Eurocurrency market plays an important role in international finance. // Because of thenature of the market and the absence of restrictions, it provides the most convenient financialservice at the lowest possible cost. // This text is a general survey of the market. // (1). It beginswith the definition of Eurocurrency and the basic characteristics of the market. (2). It thenexamines the origin of the market and the reasons for its development. (3). This is followed by adiscussion of interest rate differences that exist between the Euromarket and the domestic marketlargely due to controls in the latter market. (4). This text concludes by illustrating how interestrates are quoted and charged under different situations. 
2. Reading for gist
Read the text with about 15 minutes, and then try to answer the following questions:1
What is a Eurocurrency?2
What are the characteristics of the Eurocurrency market?3
In what way did Regulation Q and Regulation M affect the Eurodollar marketrespectively?4
How did two other regulations
namely the interest equalization tax and the voluntaryrestrictions of 1965, influence the Eurodollar market?5
How did the factor of cost contribute to the growth of the Eurocurrency market?6
What is a bid—ask spread? What is the result of low spreads in Eurocurrency?7
Why have there been substantial interest rate differentials between the domestic market
and the Euromarket?8
What is a floating interest rate? How is it used in the Eurocurrency market?9
In what way is the Eurocurrency market important to investors and corporations? 
3. Detailed Study of the Text3.1 Notes
1. a central bank (
)A central bank is a national bank charged with the control of the general activities of theordinary banks. The chief functions of a central bank are to act as the government's bank in thewidest possible sense, anticipating where possible the banking problems that may arise andexamining those that do arise. It then undertakes the appropriate operations in the money, capital,and foreign-exchange markets.2. interbank Eurocurrency market (
)The interbank market is the section of the money market in which finanacial institutions borrow and lend money among themselves for short periods. This has been a traditional operationamong banks. Interbank Eurocurrency market is such a market that deals with Eurocurrency. TheEurocurrency market is so called because one of the parties involved is always a bank.The Eurocurrency market differs from the foreign exchanges market in that it is notconcerned with buying and selling foreign exchanges but accepting deposits and making loans inEurocurrency. For example, a deposit of German marks may be made with a British bank inLondon. The bank can lend this money to any company or bank, which can then use it to obtainany currency it needs on the foreign exchange market. Transactions in the Eurocurrency marketare normally in sums of at least 6 figures and loans are made for periods ranging from overnight toa year (it can be several years now) . They are used to finance balance of payment deficits, for commercial transactions, and industrial development.Formerly known as the Eurodollar market, the Eurocurrency market has its main operationsin Europe, with others in the Asian dollar markets in Singapore and Hong Kong and others in theMiddle East and the Caribbean. Charaterized by its international nature, its enormous size, and itsindependence of the control of any particular country or organization, the Eurocurrency markethas great impact on international finance.In terms of actual operation, banks in this market publically give a quotation of two interestrates — the bid interest and the ask rate. The bid rate (
) is the interest rate at which the bank is wishing to borrow money, the ask rate (
) is the interest rate at which the bank lends money. The difference is called spread (
), which is the bank's gain from the businessof borrowing and lending. These interest rates are commonly worked out on the basis of LIBOR (
) . For a corporation or investor that wishes to enter the market, the bank  borrows money from them at the quoted bid rate less a commission, and lends money to them atthe quoted ask rate plus a commission and a risk premium (
) . For loanslonger than a year, the bank applies the floating interest rate.3. over-the-counter market (
)This usually refers to the stock market outside the main, organized stock market place such as New York Stock Exchange and London Stock Exchange. It deals with stocks and other securitiesthat are not quoted in the main market. Instead of a single trading floor where transactions aremade, the OTC market consists of a nationwide network of thousands of registered dealers who
match buyers and sellers with the help of computerised communication devices.The Eurocurrency market does not have a regular market place like London Stock Exchange.Transactions are conducted directly among its participants by telephone and telex. So it works asan over-the-counter market.4. the gold exchange standard (
)It is necessary to first understand what the gold standard is (
) . The gold standard isthe use of gold as the common basis for establishing exchange rates. It was used in the early partof this century. Under the gold standard, nations defined the value of their currencies in terms of gold. The purchase and sale of gold was unrestricted, and countries were free to import and exportgold to settle international balance of payment. A nation on the gold standard stood ready toconvert its currency into gold on demand. Therefore, the amount of gold each nation held affectedits money supply and its level of domestic economic activity. This system was brought to an endduring the Great Depression of the 1930s.After a period of chaos of non-unified practice in converting different currencies, theInternational Monetary Fund was set up at the Bretton Woods Conference in 1944 to maintain astable system of fixed exchange rates. The system is generally labeled the gold exchange standard,as opposed to the gold standard. Under this system, the U.S. dollar, as the world's key currency,was convertible into gold at a fixed price. And since other currencies could be converted intodollars at fixed exchange rates, other currencies were convertible indirectly into gold at a fixed price. This system seemed to work reasonally well during early postwar period. But as time wenton, many of the war-torn countries had rebuilt their economies and begun competing successfullywith the United States in world markets. As a result, many nations began accumulating dollar reserves, and the United States was confronted with a serious outflow of gold. This unfavorablesituation led President Nixon to announce in 1971 that the United States would no longer convertdollars into gold for foreign central banks, and had dollars devalued for the first time. In 1973, thedollar devalued again, and representatives of the major trading nations met in Paris to establish asystem of floating exchange rates, thus abandoning the gold exchange standard.5. arbitrage (
):This is the transaction of buying and selling currencies, stocks, bonds, or the like, at the sametime in different markets, in order to profit from differences in price, interest rates or ' exchangerates between markets. For example, if the exchange rate of Hong Kong dollar to U.S. dollar islower in Hong kong than that in the United States, then it would be profitable for an arbitrageur to buy a certain amount of U.S. dollars in Hong Kong and at the same time sell that amount in theUnited States for Hong Kong dollar. He would obtain a larger amount of Hong Kong dollars. Thisis known as arbitrage of exchange (
). Interest arbitrage (
) is to take advantage of thedifference in interest rates between financial markets. If the 3-month interest rate in London ishigher than the rate in New York, it would pay arbitrigeurs to borrow dollars in New York,exchange them for pounds, lend the pounds in London, and then convert the principal and interestinto dollars at the duration date.
3.2 TextMarket Characteristics

Activity (34)

You've already reviewed this. Edit your review.
1 hundred reads
1 thousand reads
shranju liked this
Shalini Kanchan liked this
Priyanka Rastogi liked this
Debra Moh liked this

You're Reading a Free Preview

/*********** DO NOT ALTER ANYTHING BELOW THIS LINE ! ************/ var s_code=s.t();if(s_code)document.write(s_code)//-->