Euro Currency Market

Introduction
A Eurocurrency Market is a money market that provides banking services to a variety of customers by using foreign currencies located outside of the domestic marketplace.

The Eurocurrency Market represents any deposit of foreign currencies into a domestic bank.
For example, if Japanese yen is deposited into a bank in the United States, it is considered to be operating under the auspices of the Eurocurrency Market.

Features of Euro currency market

It is an international market and is under no national control.
It is short term money market.

Eurodollar markets are the time deposit market. The deposit here have a maturity period ranging from one day to several months. Eurodollar is the short-term deposit. It is a wholesale market.

ContD..
It is highly competitive and sensible market: - High competitive - Sensible
The CME Eurodollar futures contract is used to hedge interest rate swaps.

Factors for growth and emergence of market

The suez crisis (1957)
Relaxation of exchange control and resumption of currency convertibility (1958) Political factors

Balance of payments deficit of us

Regulation of Q

FUNCTIONS OF EURO CURRENCY MARKET

Main function is trade of Eurocurrency deposits. Used for foreign exchange hedging purposes. Euro currency markets can at times bypass domestic channels of financial intermediation. e.g. US Corporation can acquire Eurodollars in London these deposits may be US domestic dollar deposits that have been transferred abroad during a US domestic credit creation. Channelizing surplus liquid resources

Participants in Eurocurrency Market

Government International Organizations Central Banks Commercial Banks Corporations MNC Traders Individuals

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 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.

POSITIVE IMPACT
It helped the economies to solve the liquidity problems. It provided better investment opportunities. Funds are also used 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 etc

Its International acceptance has helped in the international trade to expand and accelerated the process of globalization

POSITIVE IMPACT CONTD..

Makes possible an efficient mobilization of funds around the globe.
Encourages international cooperation among nations. Creates a cash-management source to aid the financial operations of corporations and governments around the globe.

NEGATIVE IMPACT
For 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.

NEGATIVE IMPACT CONTD..

The capacity to mobilize massive amounts of funds may contribute to instability in currency values.
Monetary and fiscal policies designed to cure domestic economic problems may not achieve their desired impact.

Euro-credit market
Tenure: Medium and Long Term Loans [up to 10--15 years 10% of loans, 58 years 85% of loans, 1 5 years 5% of loans] provided by group of banks. Security: Loans are provided without any primary or collateral security. Credit rating is the essence of lending Currency: Generally USD, but can be any other currency, as required by the borrower and ability of the lender.

Syndication of loan
Managing banks, as desired by the borrower Lead bank, generally who takes the largest share of lending

Agent bank, as required to take interest of the banks in syndication and comply with the procedure
Common assessment of the borrower and his country Common documentation

In very few cases co-financing with IMF is possible

Euro-Bonds
Euro-Bonds are unsecured securities
They are therefore issued by borrowers of high financial standing

When they are issued by government corporation or local bodies, they are guaranteed by the government of the country concerned
Euro-Bond is outside the regulation of a single country. The investors are spread worldwide

However foreign bonds are issued in only one country and are subject to the regulation of the country of issue.

Contd
Selling of EB is through syndicates of the banks
Lead manager advises about size, terms and timing of the issue Entire issue is underwritten Lead managers fees, underwriting commission and selling commission is somewhere between 2% and 2.5% of the value of the issue

Features of Euro-Bonds

Most Euro-Bonds are bearer securities

Most bonds are denominated in USD 10,000 Average maturity of the Euro-Bond is 5 to 6 years
In some cases maturity extends to 15 years

Types of Euro-Bonds
Straight or Fixed Rate Bonds
Convertible Bonds

Currency Option Bonds

Floating Rate Notes

Fixed-Rate Bonds
These are fixed interest bearing securities

Interest is normally payable yearly

Year is considered of 360 days

Maturities range from 3 years to 25 years

Right of redemption before maturity may be there or may not be there

If the right of redemption is there then redemption is done by offering an agio(premium)

Convertible Bonds
Investor has an option to convert bonds into equity shares of the borrowing company The conversion is done at the stipulated price and during the stipulated period Conversion price is normally kept higher than the market price The rate of interest is lower than the rate of interest on comparable straight bond

Sometimes the bonds are issued in a currency other than the currency of the share. This provides an opportunity to diversify the currency risk as these bonds are issued with fixed exchange rate of conversion

Currency Option Bonds

They are similar to straight bonds Generally issued in one currency and option to take interest and principal in another currency.

Exchange Rate is either fixed (generally not) or is spot rate prevailing in the market three business days before the due date of payment of interest and principal

Floating Rate Notes

Generally it is found that banks issue and invest in FRNs

FRN is similar to straight bonds with respect to maturity

Rate of interest however varies and is based on LIBOR + 1/8%, % Rate of interest is adjusted every six months

drop lock clause may also be included, which means if minimum interest rate happens to be paid then it is locked for the remaining period of the bond.

Euro-Currency Deposits
Euro-currency deposits represent the funds accepted by the bank themselves.
The deposits are accepted in Euro-currencies, as well as other currency Time deposits are accepted for periods of 1,3,6 and 12 months for all currencies

USD and Sterling pound can be placed for a period of five years

Minimum size of deposit is USD50,000 or its equivalent

Certificate of Deposit
It is negotiable instrument They are bearer instrument and can be traded in the secondary market Period: 1 year (1 month through 12 months)

Minimum amount: USD50,000

Currencies: USD, Sterling Pound, Yen

Contd
Interest Rate: 1/8 % below LIBOR Tranche CD: carries different rates of interest for each tranche

Discount CD: they are issued at discount

Euro-Notes Market
This market constitutes the instruments of borrowing issued by the corporates in the Euro-currency market
The instruments issue may be underwritten or may not be underwritten The borrowers directly approach the lenders without the intermediation of the banks or financial institution. Instruments are of the following categories:

Commercial Paper Note issuance Facilities Medium Term Notes

Commercial Paper
It is a promissory note with maturity less than a year, generally the period varies between 90 days to 180 days
Generally issue is not underwritten Amount: USD 100,000 or equivalent

Interest rate works out lesser than that is paid on bank borrowing and higher than that is paid by the bank on deposits
They are unsecured instrument

Note Issuance Facilities(NIF)

Borrowers place short term notes of 3 months to 6 months maturity directly with the investors The notes are rolled over on maturity
The banks underwrite at the time of issue as well as when the notes are rolled over With slight variation they are also known as:
Revolving underwriting facility (RUF) Note Purchase Facility (NPF)

Medium Term Notes

MTN represents Long Term, Non Underwritten and fixed interest rate source of raising finance. It can be comparable with Euro-bonds with a difference that Eurobonds issue is underwritten, where as MYN issue is not underwritten. They are have great flexibility

Risks Involved

Exchange Rate Risk Interest Rate Risk Default Risk

Euro Market VS Domestic Market

Regulation International Character Risk Level Relationship Complexity Term Nature