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Eurocurrency Market

Submitted by: Group 3


Aakash Garg (271061)
Nazuk Aggarwal (271090)
Tanvi Gupta (271115)
Mohit Mudgal (271147)
Shubhani (271168)
Introduction
FINANCIAL MARKET
It is the mechanism that facilitates the transfer of funds from lenders
(surplus units) to borrowers (deficit units). institutions & instruments are
integral part of financial market

INTERNATIONAL FINANCIAL MARKET


It is a worldwide marketplace in which buyers and sellers trade financial
assets, such as stocks, bonds, currencies, commodities and derivatives,
across national borders that is when funds flow across national boundaries
and the transfer is between parties residing in different countries
DOMESTIC FINANCIAL MARKET
It is the market in which transactions are arranged within a country of the
investor\depositor or depositor\borrower in a currency of that country itself.

INTERNATIONAL FINANCIAL MARKET: FOREIGN TRANSACTIONS


It is the market in which transactions are arranged in a country other than of
the investor\depositor or depositor\borrower in a currency of that country
itself.

INTERNATIONAL FINANCIAL MARKET: EUROMARKET TRANSACTIONS


It is a market in which transactions are arranged in a currency which is both
different to the currency of the country where the transaction happens and of
the country from where the issuer\buyerer belongs.
Eurocurrency
 “Euro” refers to the funds that are intermediate outside the country of
the currency in which these funds are denominated
 In this way, Euro currency market is a market where Euro banks accept
deposits and make loan which are essentially denominated in a currency
other than the currency of the country where that Euro banks are located
 The Eurocurrency Market provides a market for the exchange of financial
instruments denominated in currencies other than that the country
where the market is located
 Euro currency market is the largest international debt market
Introduction
 Any freely convertible currency like Dollar or Yen deposited outside it’s
country of origin
 Dominant Currency: US Dollar
 Some other Euro currencies are Swiss Franc, Dutch Guilder, German Mark
etc.
 Euro banking involves attracting funds from non-residents and making
loans to other non- residents
 Initially it was confined only to dollar deposits and loans but now it has
taken so many shapes i.e. GDRs, ADRs and so many other instruments
 Euro currency market includes both capital market and money market.
Example
 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.
Reasons for existence of Euro Currency Markets

 Political Consideration: The Socialist countries were the initiating source


of early dollar balances held in Europe. Owing to the fear of hostilities,
they avoided depositing in US Banks giving rise to Euro Currency Markets.

 Regulation Considerations & Profit Considerations: Absence of control in


Euro Markets in terms of interest rate ceilings, reserve requirements etc.
It therefore reduces the cost for both, borrowers as well as lenders.
Features of Euro Currency Market
 Whole sale market: Euro currency market is a wholesale market. Size of
transactions is large. Transactions are rarely for less than $ 1 million and
sometimes they are for $ 100 million
 Inter-Bank operations : The vast bulk of Euro currency market is confined
to inter bank operations
 Unsecured credits: No doubt Euro currency borrowers are big corporate
who have status and name in the market and thus credit risk is
comparatively low . As, Euro currency loans are unsecured credits, special
attention is required to judge credit worthiness of borrower before
providing any loan
Features of Euro Market
 Concentrated: Euro currency market is focused upon London who is
almost 1/3 of Euro currency market
 Telephone linked: Euro currency market is linked through Tele
communication which has facilitated Euro currency transaction
 Commercial banks: Commercial banks play dominant role in Euro
currency market. They act as both depositors and lenders . They accept
primary deposits & enter into inter bank transactions with Euro banks.
These features led investors to move their funds more freely. It gives
lenders and borrowers more options
 Maturity Transformation: Euro banks are also engaged in maturity
transformation by borrowing short and lending long
Types of instruments in Euro Currency Market
 Global Depository Receipts: GDR is a negotiable certificate, denominated
in US dollars that represents a non US company’s publicly traded local
currency security , which can be equity instrument / debt instrument . A
company when issues ordinary shares keeps them with custodian /
depository banks against which bank issue Drs to the foreign investors
 American Depository Receipts: ADRs are depository receipts issued by a
company in USA. In this case, a non US company deposits its securities
with a custodian bank which in turn informs the depository in US that
ADRs can be issued . The holder of such receipts enjoys same ownership
rights of underlying securities
Eurobond Market
Introduction

 Bonds sold outside the country whose currency they are dominated
in
 Free of official regulation
 Self-regulated by the Association of International Bond Dealers
 Unsecured – not much of collateral
 Cost of borrowing – Relatively Less
Company & Investor Perspective

• Companies are able to borrow funds without entering the financial


market of that country

• Investors get exposure

• Loans are syndicated

• Eurobond issued in UK and denominated by Yen – Euroyen Bond


 A Eurobond is offered for sale simultaneously in a number of
countries.

 A domestic bond - denominated in domestic currency, and offered


for sale in the domestic market.

 A foreign bond is similar to a domestic bond except that the issuer is


a foreign entity
Types Of Instruments
 Straight Fixed rate Bond - designated maturity date at which the principal
of the bond issue is promised to be repaid

 Floating-rates Notes - medium-term bonds with their coupon payments


indexed to some reference rate. (Ex - LIBOR + margin)

 Convertible Bond - option to convert it into a pre determined number of


equity shares of the company. Fixed rate of interest. Call Option & Put
Option.
 Zero Coupon Bonds - sold at a discount from face value and do not pay
any coupon interest over their life

 Dual Currency Bond – is a straight fixed-rate bond which is issued in one


currency. Interest paid in same currency. Principal payed in second
currency.
Difference between Euro Currency Market and Euro
Bond Market

 Eurocurrency loans use variable rates of interest depending on LIBOR


 Eurocurrency loans generally have shorter maturity period as compared
to Euro Bonds.
 Bonds have greater volume as compared to currency loans
 Euro currency loans have high flexibility
 Loans can be obtained faster and with much ease as compared to Euro
bonds
Factors to consider when choosing between Euro
Market and Domestic Market
 The currency that the borrower wants to obtain: Multinational companies
usually want to borrow in foreign currency to reduce their foreign exchange
exposure and therefore borrow in Euromarkets rather than the domestic
market
 The cost: There is often a small difference in interest rate between
Eurocurrency and domestic markets. On large borrowings, however, even a
small difference in interest rate result in a large difference in the total interest
charged on the loan
 Timing and speed: It may be possible to raise money on the Euromarkets more
quickly than in the domestic markets
 Security: Euromarkets loans are usually unsecured. Whereas domestic market
loans are more commonly secured. Large borrowers may therefore prefer
Euromarkets
 The size of the loans: It is often easier for a large multinational to raise very
large sums on the Euromarkets than in a domestic financial market