PRESENTATION

ON
EUROCURRENCY MARKET

PRESENTED BY:-
Sumit Singal
MBA-I(3129)
 EUROCURRENCY MARKET
An Eurocurrency is a dollar or other freely
convertible currency deposited in a country outside
its country of origin.
The Eurocurrency market then consists of those
banks—called Eurobanks—that deposit and make
loans in foreign currencies.
Thus U.S. dollars on deposit in London becomes
Eurodollars.
 CHARACTERISTICS
 Location of market not ownership of financial
institution or funds.

 Markets for both loans and deposits in foreign

currency.
 European Central Bank

It was set up in 1998

It is based in Frankfurt (Germany)
It’s job is to manage the EURO
It is responsible for framing and implementing EU’s
economic and monetary policy
The 16 members who have adopted euro as their
currency make up the Euro area and their central banks
together with ECB, make up what is called Eurosystem.
Members of Eurocurrency Market
Only 16 out of 27 members states use euro as their currency. These are:-

 Austria (2000)
 Belgium (2000)
 Cyprus (2008)
 Finland (2000)
 France (2000)
 Germany (2000)
 Greece (2006)
 Ireland (2000)
 Italy (2000)
 Luxembourg (2000)
 Malta (2008)
 Netherlands (2000)
 Portugal (2000)
 Slovenia (2007)
 Spain (2000)
 ORIGINS OF EUROCURRENCY
MARKETS

 Markets originated in mid--1950’s when banks in

Europe and Canada decided to use their funds in $ to
finance trade and investment projects.
 Eurobanks could circumvent domestic policies and
regulations, which made the business more
attractive.
 Both supply and demand factors helped the growth
of the Eurocurrency Markets.
 Contd….

 Supply Factors
 U.S. dollars were held by Europeans for transactions
in commodities and metals, for hedging purposes and
as a store of a value.
 Russians and Eastern Europeans were reluctant to
keep their $ in U.S.
 Relaxation of exchange controls in Europe in 1958.
 Contd….

 Demand Factors
 After the use of the £ was banned for financing
foreign trade, British merchant Banks offered
overseas loans in $.
 Eurobanks were able to offer higher rates on $
deposits than the rates that domestic U.S. banks
could offer.
 EUROCURRENCY LOANS

 The most important characteristics 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 the
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
 MULTICURRENCY CLAUSES

 Borrowing can be done in many different currencies.

 This clause allows the borrower the right to switch
from one currency to another on any rollover date
 Rates are fixed, at company’s discretion, at 3-months,
6 months or 12-months interval.
 At each rollover date, the firm can choose from any
freely available Eurocurrency except Eurosterling.
RELATIONSHIP b/w DOMESTIC AND
EUROCURRENCY MARKETS

Interest rates differ in both the markets due to the

following reasons:-
1.) Additional Costs like legal formalities of foreign country
2.) Risk associated with moving currency.
3.) The effectiveness of the monetary authorities’
controls.
In general, Eurocurrency spreads are narrower than in
domestic money markets.
 Contd….

Lending rates can be lower for the following reasons:-

1.) The lack of reserve requirements increases a bank’s
earning assets rate.
2.) Regulatory expenses are lower or nonexistent
3.)Eurobanks are not forced to lend money to certain
borrowers at concessionary rates.
 Contd…..

4.) Most borrowers are well known, reducing the cost

of information gathering and credit analysis.
5.) Eurocurrency lending is characterized by high
volumes, and thus transaction costs are reduced.
 Contd….

Eurocurrency deposit rates are higher because of the

following reasons:-
1.) They must be higher to attract domestic deposits.
2.) Eurobanks can afford to pay higher rates based on
their lower regulatory costs.
3.) A larger percentage of deposits can be lent out.
4.) Eurobanks are not subject to interest rate ceilings
that prevail in many countries.
 EUROMARKET TRENDS

In recent years, the London interbank offer rate has started to

fade as a benchmark for lending in the Eurocurrency market.

In a trend that shows no sign of abating, a growing number of

creditworthy borrowers-including Denmark, Sweden, several
major corporations, and some banks—are obtaining financing
in the Euromarkets at interest rates well below LIBOR.
 EUROBONDS

Eurobonds are similar in many respects to the public debt sold in

domestic capital markets.
Unlike domestic bond markets, however, the Eurobond market is
almost entirely free of official regulation, but instead is self—
regulated by the Association of International Bond Dealers.
The Eurobond market has been substantially smaller than the
Eurocurrency market.
Borrowers in the Eurobond market must be well known and must
have impeccable credit ratings (for example, developed countries,
international institutions, and large multinational corporations).
 Contd….

Eurobond market has grown dramatically over the past years

and its size now rivals that of Eurocurrency market, but
Eurocurrency market has had its ups and downs.
80

70

60

50

other Eurobnds
40
EuroDM bonds
Eurodollar bonds
30

20

10

0
1979 1980 1981 1982 1983 1984
 SWAPS

Swap is a financial transaction in which two

counterparties agree to exchange streams of payments
over time.
The introduction of this technique has catalyst the
growth in the Eurobond market.
Swaps allow borrowers to raise money in one market
and to swap one interest rate structure for another or
to swap principal interest from one currency to another.
 Contd….

These swaps allow the parties to contract to arbitrage

their relative access to different currency markets; a
borrower whose paper is much in demand in one
currency can obtain a cost saving in another currency
sector by raising money in the former and the swapping
the funds into the latter currency.
 PLACEMENT

Issues are arranged through an underwriting group,

often with a hundred or more underwriting banks
involved for an issue as small as $25 million.
A growing volume of Eurobonds is being placed
privately because of the simplicity, speed, and the
privacy with which private placements can be arranged.
 CURRENCY DENOMINATION

Historically, about 75% Eurobonds have been dollar denominated.

During the late 1970’s, however, when the dollar was in a
downward spiral, other currencies became more important in the
Eurobond market.
The sharp increase in the share of dollar—denominated
Eurobonds in the period up to mid-1984 shown in the above
figure, largely reflects the surging value of the dollar.
The absence of Swiss franc Eurobonds is due to the Swiss Central
Bank’s ban on using the Swiss franc for Eurobond issues.
 Contd….

As an alternative to issuing dollar, Deutsche-mark, or

other single-currency-denominated Eurobonds, several
borrowers in recent years have offered bonds whose
value is a weighted average or “basket” of several
currencies.
The most successful of these currency “cocktails” is the
European Currency Unit (ECU).
 EUROPEAN CURRENCY UNIT

ECU bonds offer advantages to both investors and

borrowers, including the following:
1.) Access to markets that otherwise be available.
2.) Diversification of currency risk, especially for
investors and borrowers within the European Monetary
System
3.) A hedge against the dollar.
 EUROBONDS Vs.
EUROCURRENCY LOANS

Both Eurocurrency and Eurobond financing have their

advantages and disadvantages. The differences are
categorized in five ways:-
1.) Cost of borrowing
2.) Maturity
3.) Size of issue
4.) Flexibility
5.) Speed
 NOTE ISSUANCE FACILITIES

Eurobanks created an instrument in response to the competition

from Eurobond market:-
The Note Issuance Facility
NIFs—sometimes also called short—term note issuance facilities
or SNIFs—have some feature of the U.S. commercial paper
market and some features of U.S. commercial lines of credit.
Like commercial paper, notes under NIFs are unsecured short—
term debt generally issued by large corporations with excellent
credit ratings. Indeed, NIFs are sometimes referred to as
Eurocommercial paper.
 Contd….

NIFs are more flexible than floating—rate notes and usually

cheaper than syndicated loans.
As in the case of floating—rate notes, the popularity of NIFs
benefits from the market’s current preference for lending to
high—grade borrowers through securities rather than bank
loans.
Most Euronotes are denominated in U.S. dollars and are issued
with high face values (often $5, 00,000 or more).
They are intended for professional or institutional investors
rather than private individuals.
 NOTE ISSUANCE FACILITIES Vs.
EUROBONDS

1.) Drawdown of flexibility

2.) Timing flexibility
3.) Choice of maturities
4.) Secondary Market
THE ASIACURRENCY MARKET

Although dwarfed by its European counterpart, the Asiacurrency (or

Asiadollar) market has been growing rapidly in terms of both size and
range of services provided.
Located in Singapore because of the lack of restrictive financial controls
and taxes there, the Asiadollar market was founded in 1968 as a satellite
market to channel to and from the Eurodollar market the large pool of
offshore funds, mainly U.S. dollars, circulating in Asia.
Its primary economic functions these days are to channel investment
dollars to a number of rapidly growing Southeast Asian countries and to
provide deposit facilities for those investors with excess funds.
 BALANCE SHEET
OF
EUROBANKS

Assets
Deposits in other Eurobanks
Working balance in U.S.
Bank
Loans to financial and non
financial entities
Liabilities
Deposits of financial and
non financial entities
Call Money
Certificates of deposit
Floating Rate Notes
 Eurodollar Creation

Citibank Leksell AB
Demand deposit Demand deposit
Leksell AB in Citibank
+$1M +$1M
 Contd….

Citibank Leksell AB
Demand deposit Demand deposit Time deposit
due Leksell AB in Citibank+$1M Owned Leksell
-$1M +$1M

Demand deposit
due Barclays
+$1M
 Contd….

Leksell AB
Demand deposit
in Citibank
-$1M
Demand deposit
in Barclays
+$1M

Source : Multinational Financial Management By Shapiro

Thank You