CURRENCY MARKETS The currency market includes the Foreign Currency Market and the Euro-currency Market.

The Foreign Currency Market is virtual. There is no one central physical location that is the foreign currency market. It exists in the dealing rooms of various central banks, large international banks, and some large corporations. The dealing rooms are connected via telephone, computer, and fax. Some countries co-locate their dealing rooms in one center. The Euro-currency Market is where borrowing and lending of currency takes place. Interest rates for the various currencies are set in this market.

Trading on the Foreign Exchange Market establishes rates of exchange for currency. Exchange rates are constantly fluctuating on the forex market. As demand rises and falls for particular currencies, their exchange rates adjust accordingly. Instantaneous rate quotes are available from a service provided by Reuters. A rate of exchange for currencies is the ratio at which one currency is exchanged for another.

The foreign exchange market has no regulation, no restrictions or overseeing board. Should there be a world monetary crisis in this market; there is no mechanism to stop trading. The Federal Reserve Bank of New York publishes guidelines for Foreign Exchange trading. In their "Guidelines for Foreign Exchange Trading", they outline 50 best practices for trading on the forex market.

Spot Exchange The spot exchange is the simplest contract. A spot exchange contract identifies two parties, the currency they are buying or selling and the currency they expect to receive in exchange. The currencies are exchanged at the prevailing spot rate at the time of the contract. The spot rate is constantly fluctuating. When a spot exchange is agreed upon, the contract is defined to be executed immediately. In reality, a series of confirmations occurs between the two parties. Documentation is sent and received from both parties detailing the exchange rate agreed upon and the amounts of currency involved. The funds actually move between banks two days after the spot transaction is agreed upon.

Forward Exchange The forward exchange contract is similar to the spot exchange. However, the time period of the contract is significantly longer. These contracts use a forward exchange rate that differs from the spot rate. The difference between the forward rate and the spot rate reflects the difference in interest rates between the two currencies. This prevents an opportunity for arbitrage. If the rates did not differ, there would be a profit difference in the currencies. That is, investing in one currency for a year and then selling it should be the same profit or loss as setting up a forward contract at the forward rate one year in the future. Investing in one currency would be more profitable than investing in the other. Thus there would exist an opportunity for arbitrage. Forward exchange contracts are settled at a specified date in the future. The parties exchange funds at this date. Forward contracts are typically custom written between the party needing currency and the bank, or between banks.

Currency Options

A currency option gives the holder the right, but not the obligation, either to buy (call) from the option writer, or to sell (put) to the option writer, a stated quantity of one currency in exchange for another at a fixed rate of exchange, called the strike price. The options can be American, which allows an option to be exercised until a fixed day, called the day of expiry, or European, which allows exercise only on the day of expiry, not before. The option holder pays a premium to the option writer for the option.

The option differs from other currency contracts in that the holder has a choice, or option, of whether they will exercise it or not. If exchange rates are more favorable than the rate guaranteed by the option when the holder needs to exchange currency, they can choose to exchange the currency on the spot exchange rather than use the option. They lose only the option premium. Options allow holders to limit their risk of exposure to adverse changes in the exchange rates.

EUROCURRENCY MARKET The money market in which eurocurrency, currency held in banks outside of the country where it is legal tender, is borrowed and lent by banks in europe. the eurocurrency market is utilized by large firms and extremely wealthy individuals who wish to circumvent regulatory requirements, tax laws and interest rate caps that are often present in domestic banking, particularly in the united states.

The rates on deposits in the eurocurrency market are typically higher than in the domestic market, because the depositor is not protected by domestic banking laws and does not have governmental deposit insurance. rates on loans in the eurocurrency market are typically lower than those in the domestic market, because banks are not subject to reserve requirements on eurocurrency and do not have to pay deposit insurance premiums.

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 concept does not have anything to do with the European Union or the banks associated with the member countries, although the origins of the concept are heavily derived from the region. Instead, 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. The Eurocurrency Market has its roots in the World War II era. While the war was going on, political challenges caused by the takeover of the continent by the Axis Powers meant that there was a limited marketplace for trading in foreign currency.

With no friendly government operations within the European marketplace, the traditional economies of the nations were displaced, along with the currencies. To combat this, especially due to the fact that many American companies were tied to the well-being of business behind enemy lines, banks across the world began to deposit large sums of foreign currency, creating a new moneymarket.

One of the factors that make the Eurocurrency Market unique compared to many other moneymarket accounts is the fact that it is largely unregulated by government entities. Since the banks deal with a variety of currencies issued by foreign entities, it is difficult for domestic governments to intervene, particularly in the United States. However, with the establishment of the flexible exchange rate system in 1973, the Federal Reserve System was given powers to stabilize lending currencies in the event of a crisis situation. But one problem that arises is that these crises are not defined by the regulations, meaning that intervention must be established based on each case and the Federal Reserve must work directly with central banks around the world to resolve the matter. This adds to the volatility of the Eurocurrency Market. Despite its name, the Eurocurrency Market is primarily influenced by the value of the American dollar. Nearly two-thirds of all assets around the globe are represented by U.S. currency. The challenge with foreign banks revolves around the fact that regulations enforced by the Federal Reserve are really only enforceable within the U.S. The taxation level and exchange rate of the American dollar varies depending on the nation. For example, an American dollar in Vietnam is worth more than it is in Canada, further influencing the market.

Origin of euro currency market The origin of the Eurocurrency market-that is, the market in currency trading outside their respective domestic economy. Several factors were behind their birth. (1). The centrally planned economies were reluctant to hold bank deposits in the United States, so they put their dollar earnings on deposit in London. Gradually other European dollar holders did the same, a tendency that was particularly marked when the United States ran large balance of payments deficits. (2). Balance of payments pressures made the United Kingdom government limit British banks' external use of sterling, so they had a strong incentive to develop business in foreign currencies. (3). By the end of 1958 the main industrial countries had restored full convertibility of their currencies. The new freedom produced a surge of international banking business. The growth of the Eurocurrency market was also stimulated by certain monetary regulations in the United States. For instance, Regulation Q put a ceiling on the interest rates that banks operating in the United States could offer to domestic depositors were naturally attracted to Eurobanks that were not bound by Regulation Q. In addition, banks in the United States were required to hold non-interest-bearing reserves. By diverting dollar deposits to their offshore branches or subsidiaries, U.S. banks were able to avoid tying up so much of their funds in reserve requirements at a zero rate.

EURO MONEY Hw it is created ? A national currency becomes part of offshore currency market when it is transferred to a bank outside its own monetary system, i.e. transferred to a bank outside the nation in question. Ex-US dollar held in Paris qualifies as Euro currency.

Reasons for the growth of the Euro money market. Reasons for the growth of the Euro money market. Depositors receive better terms than they can otherwise obtain at home (i.e. better interest rates on deposits than home interest rates). Borrowers can borrow more , possibly at lower interest rates than they can at home ( on shore).

Euro-money comprises of Euro deposits and Euro-currency. Euro Deposits Euro Deposits Concept Nature Reasons for the growth of the market. The deposits denominated in currencies made outside the domestic banking system operation are called as Euro deposits. Thus, when a currency deposit is made in a bank outside the jurisdiction of the central bank which issued the currency is termed as Euro deposit. More risky as beyond the control of domestic banking authority.

Nature of Euro deposits Nature of Euro deposits They are primarily conventional short term deposits (30 days or 90 days). Interest rates on such deposits are fixed. Term is short. They are non-negotiable (unless specified). Interest rates fluctuates in response to demand & supply pressures. Can be made in currencies like ECU / SDR.

Reasons for the growth of the Euro deposit market Reasons for the growth of the Euro deposit market. Depositors receive better terms than they can otherwise obtain at home (i.e. better interest rates on deposits than home interest rates). Borrowers can borrow more , possibly at lower interest rates than they can at home ( on shore).

Euro Currency: Euro Currency Concept Creation Growth Features Functions The Euro markets Attraction Drawbacks Difference between Domestic & Euro Currency markets Difference between Eurobonds & Eurocurrency loans.

WHAT IS EURO-CURRENCY?: Euro-currency is any currency banked outside its country of origin. Thus it is a non-domestic financial intermediary. It is extremely large & has grown rapidly in a short interval. It has received a bad press from Central Banks, which continuous to call it a major cause of inflation & an obstacle to their control of domestic monetary systems

Creation of Euro Currency Creation of Euro Currency One can take the physical currency of a country & deposit it in a bank in another country. Banks do hold currency of other countries but mainly for the convenience of travelers. One can transfer deposits from within the country whose currency is in question to an offshore bank. This may well be an overseas subsidiary of the very same bank with which the original deposit was held.

Growth of Euro-Currency Growth of Euro-Currency Growth 1950s. Eastern Europeans, afraid US would seize deposits to reimburse claims for business losses as a result of Communist takeover of Eastern Europe. Currency deposited by national governments or corporations in banks outside their home market. This applies to any currency and to banks in any country.

Growth depositors receive better terms than they can receive onshore. borrowers can borrow more, possibly at power rates, than they can onshore

CHARACTERISTICS OF A THE EUROCURRENCY MARKET: Highly Unregulated: It is a large international money market relatively free from government regulation and interference, i.e., the market is essentially unregulated. The deposits in the Eurocurrency market are primarily for short-term. This sometimes leads to problems about managing risk, since most Eurocurrency loans are for longer periods of times. It is generally outside the direct control of any government regulation. More specially they do not face compulsory reserve requirements, interest ceiling on deposits and so on. For example, the dollar deposits in London are outside the control of US, because they are in London, and they are also outside the control of the British government because they are in dollars.

Short Term Nature: Deposits are primarily short term. Most of the deposits are inter bank, and they tend to be very short term. This leads to concern about risk, since most Eurocurrency loans are for longer periods of time. The maturity nature of some deposits is as short as one day and majority are under six months. The Eurocurrency loans are generally for short period i.e. three months or less.

Wholesale Market: Transactions, in this market are generally very large with government, public sector organizations tending to borrow most of the funds. This makes the market a wholesale rather than a retail market. Also, approximately 80% of the Eurodollar market is inter bank, which means that the transactions take place between banks. Generally the size of individual transaction is above $1 million. It is centered in London.

Highly competitive Market: There are no entry barriers. There is free access to the new institutions in the market. The lending rates are low and deposit rate are high, thus allowing a wafer thin margin for operations. Consumers, i.e. investors and borrowers derive advantage out of this situation.

Types of transactions: Japanese Exporter, earning USD, keeps these USD in London Bank (say AMEX)as Deposit. AMEX bank may use such deposits for lending to a French Importer. Indian exporter, earning Japanese Yen, keeps these Yen in Korea as Deposit .Nigerian Importer avails loan in INR from Russia to import machinery from India.

Floating rates of interest based on LIBOR [London Inter bank Offered Rate]: The rate of interest in the market is linked to the Base Rate usually LIBOR, i.e. London InterBank Offered Rate .The rate of interest on advances and deposits is reviewed periodically and amended according to changed circumstances, if any in LIBOR.

Difference between Euro currency market & Domestic money market.:

1) The absence of reserve requirements in Euro currency market means the absence of direct control by Central Banks. Central banks are gradually feeling their way towards some partial solutions of this problem, but the situation is certainly not as clear-cut as in each country's domestic markets 2) The absence of international character means that like the foreign exchange market, the Euro market does not exit in any particular location. It consists of participants all around the world linked together by telephones, telexes & increasingly by computerized information systems. Thus, it is a continuous market. 3) There are number of problems in euro currency market as compared to domestic market such as jurisdiction, the acceptability of a freeze on deposits in one country by another country whose currency is being traded in the first country, booking a loan in one centre rather than another is merely legitimate tax planning or tax evasion etc.s

4) The Euro currency market is purely wholesale market as compared to domestic market which is retain banking market. Thus it is got relative freedom from regulations as compared to domestic markets. 5) The Euro currency market is almost exclusively concerned with matched deposit dealing. That is, each deposit (liability) of an international bank will tend to be matched by an asset (usually a deposit in another bank) of the same currency & of similar maturity. 6) In Euro currency market loans are typically made for specific period & funded by a deposit of a similar period. This is very different from a domestic market where typically large amounts of lending are done on the basis of a prime (or base) rate, with these loans being funded day to day in the domestic overnight or short-date money market or from normal customer deposits. 7) In Euro currency market as compared to domestic deposits are time deposits at fixed interest rates, usually of short maturity. Many of these deposits are on call , thus these can be withdrawn without notice.

Difference between Eurobond vs. Eurocurrency loans:

Difference between Eurobond vs. Eurocurrency loans Five Differences a. Eurocurrency loans use variable rates b. Loans have shorter maturities c. Bonds have greater volume d. Loans have greater flexibility e. Loans obtained faster

EURO BANKING Concept of Euro Banking Euro Bank is a financial intermediary that bids for time deposits & makes loans in the offshore market. Usually, this will also mean that it deals in currencies other than those of the country in which it is located.

Concept of Euro Banking can be created in two ways1) One can take the physical currency of a country out of the country & deposit it in a bank of another country. 2) A national currency deposit becomes part of the offshore currency market when it is transferred to a bank outside the controlled national monetary system.

Features of Euro Banking: Features of Euro Banking Unregulated institutions Not subject to interest rates ceilings. Advantage of low tax location Margins are low & overheads cost low. Are subject to greater risk than domestic banks. Unprofitable in nature. Less subject to pressures from government.

Risks of Euro Banking: Risks of Euro Banking Exchange Rate Risk-due to assets & liabilities denominated in different foreign currencies. Interest Rate Risk-mismatch of maturity between assets & liabilities as deposits are short term & lending is long term.

Default Risk-default in payments-especially in case of MNCs & governments.

Euro Banking & the Central Bank The central banks often voice their concern about the offshore markets. They are- While the central banks have a stronger control on credit creation but this control is lost when the banking business slips to offshore markets.

They are- As the euro markets are still viewed by the press & the public as mysterious & omnipotent, they make convenient scapegoats for failures of nerve in the handling of domestic monetary policy.

Euro Banking & the Central Bank.: The central bank has control over the allocation of credit if there is no euro banking. With the Euro banking in place, they have no control over allocation of credit in the offshore capital market. Thus, as the banking business slips to offshore markets , the control on money supply declines. There exits a strong arbitrage connection between the domestic & offshore markets because the interest rate differentials exist between these two markets. It will be possible only when the deposit rate of one market is greater than the lending rate of the other market. Suppose CRR is changed for controlling credit by impounding a larger portion of fresh deposits, to avoid this regulation the funds may be siphoned to offshore markets. Similarly, to avoid these regulations , the funds may be shifted from the domestic markets to offshore markets.

Interaction between the euro-currency markets and the exchange markets

This is an essay on a fairly technical subject: the interaction between the Euro-markets and the exchange markets. The possible justification for producing such a lengthy paper on this topic is twofold. Firstly, the important role international banking flows seem to have played recently in the rather exceptional exchange-market performance of the US dollar. And, secondly, the circumstance that, like its autonomous money and credit-creating potential, the exchange-market implications of the Euro-market appear still to be a highly controversial and much misunderstood subject. While in no way claiming to provide the ultimate answers, this essay seeks to present a broad analytical framework for approaching the question from various angles. The paper is divided into three parts. The first explores the exchange-market implications of Euro-market transactions, starting from the assumption of a given pattern of international capital flows. The method used is that of partial equilibrium analysis, although in the concluding section an attempt is made to evaluate some of the broader implications of the existence of the Eurocurrency market for the theory of exchange rate determination. The second part, by contrast, discusses the influence the Euro-market may exert on exchange rate developments through its impact on the volume and geographical pattern of international capital flows. Apart from some general considerations, it examines in greater detail three specific issues:

(a) The impact of the Euro-market on the exchange rates of the currencies which are used as the principal denominations in the Euro-currency market; (b) The exchange-market implications of the Euro-currency market in its role as an official reserve outlet; and (c) The potential role of the Euro-market in times of pronounced currency unrest. The third part, which is rather more empirical in nature, briefly surveys the influence bankrelated capital flows between the United States and the rest of the world may have had on the performance of the US dollar over the past ten years or so. It highlights, in particular, the important role bank-related capital flows have played in recent years in conjunction with the dramatic deterioration in the US current-account balance.

INSTRUMENTS OF THE EUROCURRENCY MARKET: Time Deposits: The overwhelming majority of money in the Eurodollar market is held in fixed-rate time deposits (TDs). The maturities range from overnight to several years, although most are from one week to six months. Eurodollar time deposits are intrinsically different from dollar deposits held at banks in the United States only in that the former are liabilities of IBFs or of banks located outside the United States. The bulk of Eurodollar TDs are interbank liabilities. They pay a fixed, competitively determined rate of return.

Eurodollar CDS: Another important Eurodollar instrument is the Eurodollar certificate of deposit (CD). Essentially, a Eurodollar CD is a negotiable receipt for a dollar deposit at a bank located outside the United States or in a U.S. IBF. From their introduction in 1966, the volume of Eurodollar CDs outstanding reached roughly $50 billion at the beginning of 1980.By late 1990, Eurodollar CD volume was around $130 billion. Eurodollar CDs are issued by banks to "tap" the market for funds and are commonly issued in denominations of from $250,000 to $5 million. Some Eurodollar CDs, called Tranche CDs, are issued in very large denominations but marketed in several portions in order to satisfy investors with preferences for smaller instruments. The latter are issued in aggregate amounts of $10 million to $30 million and are offered by banks to individual investors in $10,000 certificates, with each certificate having the same interest rate, issue date, interest payment dates, and maturity.

Eurodollar floating rate CDs (FRCDs) & Eurodollar floating rate notes (FRNs): In the late 1970s Eurodollar floating-rate CDs (FRCDs) and Eurodollar floating-rate notes (FRNs) came into use as means of protecting both borrower and lender against interest rate risk. By making their coupon payments float with market interest rates, these "floaters" stabilize the principal value of the paper. The market for FRCDs is no longer active. The volume of FRNs outstanding fell from $125 in 1986 to $116 in 1990. Eurodollar FRNs have been issued in maturities from 4 to 20 years, with the majority of issues concentrated in the five- to seven-year range. Eurodollar FRNs tend to be seen as an alternative to straight fixed-interest bonds, but they can in principle be used like FRCDs.

Eurocurrencies: Causes of Growth

The long-term growth of the Eurocurrency market was driven neither by politics nor by regulatory worries, but instead by economics. From the beginning, the British authorities set a precedent by not attempting to regulate Eurocurrency banking.To this day, in all of theworldsmajor financial centers, neither home- nor host-country regulators impose any of the costly burdens that they place on domestic banks: requirements such as holding noninterestbearing reserves, interest rate controls, deposit insurance, or high taxes. Typically also, restrictions on the entry of new banks are minimal. Moreover, Eurobanks that is, the international departments of big banks that offer offshore deposits accept only wholesale deposits, mostly $1 million or more.

A major impetus for growth of Eurobanking came with the virtual doubling of oil prices in the fall of 1973. In the context of heightened tension with the United States over its support for Israel, Middle Eastern oil exporters deposited much of their expanding oil revenues in Eurodollars in London. At the same time, oil-importing countries were hungry for hard currency loans. The Eurocurrency market expanded rapidly to meet this demand. Doomsayers had predicted disaster if the oil revenues were not recycled.The InternationalMonetaryFund (IMF) had until then been the conventional lender to deficit countries but lacked capacity to recycle such unprecedented amounts. The Eurocurrency markets grew seamlessly and saved the day.

EUROBONDS
Definition of 'Eurobond' A bond issued in a currency other than currency of the country or market in which it is issued.

A Eurobond is an international bond that is denominated in a currency not native to the country where it is issued. Also called external bond; "external bonds which, strictly, are neither Eurobonds nor foreign bonds would also include: foreign currency denominated domestic bonds. The Eurobond market is made up of investors, banks, borrowers, and trading agents that buy, sell, and transfer Eurobonds. Eurobonds are a special kind of bond issued by European governments and companies, but often denominated in non-European currencies such as dollars and yen .

The Eurocurrency and Eurobond Markets

Eurocurrency markets are defined as banking markets which involve short-term borrowing and lending conducted outside of the legal jurisdiction of the authorities of the currency that is used. For example, Eurodollar deposits are dollar deposits held in London and Paris. The Eurocurrency market has two sides to it; the receipt of deposits and the loaning out of those deposits. By far the most important Eurocurrency is the Eurodollar which currently accounts for approximately 60 65% of all Eurocurrency activity, followed by the Euroeuro, Eurofrancs (Swiss), Eurosterling and Euroyen. The use of the prefix Euro is somewhat misleading because dollar deposits held by banks in Hong Kong or Tokyo are equally outside the legal jurisdiction of the US authorities and also constitute Eurodollar deposits. This more widespread geographical base means that Euromarkets are often referred to as offshore markets.

Since the 1960s there has been an astonishing rate of growth of the Eurocurrency market (see Table 12.1). In 1963 the gross total value of Eurobank assets (a similar figure applies to deposit liabilities) was approximately $12.4 billion, but by the end of 2003 the Eurodollar market stood at $15,929 billion, works out at an average growth rate of 19.6% per annum over the 40 years! Measuring the actual size of the Eurocurrency market presents some difficulty because a distinction needs to be made between the gross and net size of the Eurocurrency market. The gross measure includes both non-Eurobank and interbank deposits, while the net measure excludes interbank deposits. The gross measure gives an idea about the overall activity in the Euromarkets while the net measure gives a better indication concerning the ability of the Eurobanking system to create credit.

The Eurocurrency market is part of the international money market since it involves lending and borrowing for a period of less than a year. By contrast, the Eurobond market is part of the international capital market and involves lending and borrowing for a periods of more than a year. A Eurobond is a bond that is sold by a government, institution or company in a currency that is different from the country where the bond is issued. For example, a dollar bond sold in London is a dollar Eurobond and a sterling bond sold in Germany is a sterling Eurobond. Both the Eurocurrency and Eurobond markets are in many ways a phenomenon of the increasingly open world trading system. There is no reason why borrowing and lending in a given currency needs be carried out exclusively in the particular country that issues the currency.

In this chapter, we deal with the origins and reasons for the subsequent rapid growth of Eurocurrency and Eurobond markets over the last three decades. We also examine the basic functioning of these markets and their economic impact. Firstly we look at the Eurocurrency markets and then look at the Eurobond markets

EUROEQUITY
Newly public companies that want to raise more money tend to issue this type of stock. Euroequity is a term used to describe an initial public offer occurring simultaneously in two different countries. The company's shares are listed in various countries rather than where the company is based. This method differs from cross-listing where company shares are listed in the home market and then listed in a different country. Euroequities are sometimes European securities sold on several national markets.

EUROCURRENCIES EXPORTING

The Eurocurrency market is an important source of debt available to the MNE. A Eurocurrency is any currency that is banked outside of its country of origin. Eurodollars, which constitute a fairly consistent 65-80 percent of the market, are dollars banked outside of the United States. Dollars held by foreigners on deposit in the United States are not Eurodollars, but dollars held at branches of U.S. or other banks outside of the United States are Eurodollars. Similar markets exist for Euro-Japanese yen (Euro-Yen), Euro-German marks (Euro-Deutsche marks), and other currencies, such as British pounds, Swiss francs, and French francs. The Eurocurrency market is worldwide. Large transactions take place in Asia (Hong Kong and Singapore), the Caribbean (the Bahamas and the Cayman Islands), and Canada, as well as in London and other European centers. However, London is the key center for the Eurocurrency market, given that nearly 20 percent of all Eurocurrency transactions in 1989 took place in London. Luxembourg is the center for Euro-Deutsche mark deposits, with Brussels and Paris the centers for Euro-Sterling deposits.5

The major sources of Eurodollars are:

(1) foreign governments or individuals who want to hold dollars outside of the United States;

(2) multinational corporations with cash in excess of current needs;

(3) European banks with foreign currency in excess of current needs; and

(4) the reserves of countries such as Japan, Taiwan, and Germany that have large balance-oftrade surpluses. The demand for Eurocurrencies comes from individuals, firms, and governments that require funds for operating capital, investment, and the payment of principal and interest on debt. Eurocurrencies exist partly for the convenience and security of the user and partly because of the cheaper lending rates for the borrower and better yield for the lender. The security issue arose because some governments feared currency controls in the United States and decided that they wanted to,hold their U.S. dollars offshore.

Eurocurrency Expansion The key to Eurocurrency expansion is the fractional reserve concept. The totai sjze Qf tne Eurocurrency market is much greater than the actual cash deposited. Once a Eurocurrency (assume dollar) deposit is made in a London bank, the bank may use that asset as a basis for making a dollar-denominated loan to someone else. The fraction of the original deposit not loaned out is called the fractional reserve. Since there are no reserve requirements on Eurocurrency deposits, it is up to the individual bank to determine how much protection it requires in the form of reserves. The expansion occurs when the initial loan is spent, deposited in another bank, or used as a basis for another loan. Even though there are no specific Eurocurrency controls, banks are subject to solvency rules, and Eurocurrency assets and liabilities are a part of the overall assets and liabilities of the bank that are subject to capital ratios and capital provisions. In some cases, such as in Britain with the Bank of England, liquidity is monitored very closely; a Central Bank can issue more of its own currency to ease a liquidity crisis, but it would be hampered by a liquidity crisis caused by another currency.

Market Size The size of the market is difficult to determine and depends on whether the gross or net size is being discussed (the net size eliminates transfers between banks). Gross liabilities usually are just over twice the net size of the market. In 1971 the total gross Eurocurrency market size was about $150 billion. As Fig Q , shOWs, the market grew to $4,561 trillion by March 1988. It was estimated that the market reached $6.1 trillion by September 1989.6 Figure 9.2 illustrates that the dollar portion of the Eurocurrency market has remained over 70 percent for most of the past decade, although the importance of the dollar has diminished in recent years, especially as the dollar has fallen in value. By 1988 the dollar portion had slipped to less than 70 percent. As the dollar rises in value, however, the dollar portion of Eurocurrencies will also rise

PRACTICES IN FPOREIGN EXCHANGE MARKETS

Choice Prices:

A choice price is one where the market marker quotes a single rate at which the market user can choose to buy or sell. This is sometimes done where the amount is small, but the counterparty relationship is a good one. Alternatively, if the market maker already has a profitable position he may be content either to close that position or to increase it at the same price.

In practice, choice prices are more frequently used to manipulate the market user. The convention is that it is extremely bad etiquette to turn down a choice price; the market user is morally obliged to deal. If the market maker is certain that the customer is a buyer of base currency, for example, he may quote a high choice price. This not only gives the market marker a deal at a good price. This not only gives the market marker a deal at a good price, but also shows the market user that his intentions are transparent.

Choice prices are also quoted to counterparties who call persistently for prices but never deal. Market makers do not like to be used as a market information service by other banks

Liquidity:

The market for a currency is said to be liquid when customers can readily buy or sell any quantity of the currency. A feature of liquid markets is competition between market makers, resulting in narrow spreads between bid and offered prices. Liquidity in most currencies varies from one FX centre to another, and between the spot and forward markets. For example, there is a liquid spot market for the Spanish peseta in Madrid, Paris and London , but I other centers, especially outside Europe ,the peseta market is much less liquid and customers will have more difficulty in finding a bank willing to buy or sell the currency at a competitive price.

Inter bank trading in currencies does have one significant benefit for trade-related and investment-related FX transactions. The high volume of speculative inter bank trading creates much greater liquidity in the market, which narrows the bid-offer spreads. This offsets to some extent, the problems of volatility in exchange rates created by speculative inter bank trading.

Nostro Accounts:

A bank that trades actively in the FX makers has to maintain currency bank accounts (nostro accounts) in all the currencies in which it trades, to meet payment requirements as these fall due. Current accounts are therefore maintained with correspondent banks in other countries. For example, a UK bank will keep a US dollar current account with a US correspondent bank, a Deutschemark current account with a German correspondent bank, a Hong Kong dollar account with a correspondent in Hong Kong, etc.

A banks trading desk is long in a currency where the total open position (current balance plus money due in at forward dates: minus money payable at forward dates) is positive, and is short in a currency when the total open position is negative. A banks trading desk is long in a currency where the total open position (although new FX market transactions can be made to maintain its required position). Buying a currency lengthens the banks position in that currency: selling a currency shortens the position.

Banks do not always want to have a position (long or short) in currencies in which they trade, and can square temporary positions through the FX swap transactions. For example, if a UK bank does not wan to be long in Spanish pesetas, but has a pesetas dealing desk, it can buy a quantity of pesetas spot and simultaneously sell them forward. This will give the bank a working balance in pesetas to meet its short term payments requirements, but the spot purchases and matching forward sale avoids the need to hold a long position in the peseta.

Dealing Activity:

Within each FX centre, a bank will have a specialist spot market trader for each currency in which it deals. For example, ABC Bank in London will have a spot market trader for each currency in which it deals. For example, ABC Bank in London will have a spot trader for sterling against US dollars, another for euros and another for yen. The trader keeps a book of the purchases and sales of the currency transacted o behalf f the bank. If the aim is to keep a square position, buying and selling equal quantities of the currency, the trader will adjust bid and offered spot prices according to demand and supply from customers.

For example, suppose a German bank is quoting 1.3665-1.3670 for the US dollar/Euro rate, and wished o maintain its current position in dollars. If it then transacts a deal involving the sale of, say, USD 5 million in exchange for euros, it will want to buy dollars to restore its position.

It could therefore alter its quoted rates to say, 1.3667-1.3672, i.e., raise the value of the dollars against the euros, hoping that its new rate will attract sellers of dollars. However, the market is very competitive and banks must avoid the risk of setting rates that are significantly out of line with other banks..

The job of the spot trader is to make markets in his currency. When a call is received from a customer asking for a quotation, the call is handled by a customer-dealer, who will ask for a spot price quotation from the trader in the currency. If the transaction is agreed, the trader is informed, so that he can keep his book up to date.

If the dealer buys a currency, he will normally look to lay off the purchase, selling the currency to another bank or corporate buyer.

Spot prices vary according to supply and demand in the market, so if a dealer wants to lay off a deal to earn a profit, speed is essential. Dealers will therefore commonly sell currency immediately after buying it, and vice versa.

Speed is critical when deciding which rate to offer.

If a bank is long in the currency, the dealer will offer a spot rate more attractive more attractive to a buyer of that currency than a seller.(i.e. he will lower the rate).

If a bank is short in the currency, it will be eager to buy and will offer higher spot rates.

ADVANTAGES OF EUROCURRENCY MARKET:

Transaction costs will be eliminated.

For instance, Uk firms currently spend about 1.5 billion a year buying and selling foreign currencies to do business in the EU. With the EMU this is eliminated, so increasing profitability of EU firms.

Advice to young people: You can go on holiday and not have to worry about getting your money changed, therefore avoiding high conversion charges.

Price transparency.

Eu firms and households often find it difficult to accurately compare the prices of goods, services and resources across the EU because of the distorting effects of exchange rate differences. This discourages trade. According to economic theory, prices should act as a mechanism to allocate resources in an optimal way, so as to improve economic efficiency. There is a far greater chance of this happening across an area where E.M.U exists.

Advice to young people: We can buy things without wrecking our brains trying to calculate what price it is in our currency.

Uncertainty caused by Exchange rate fluctuations eliminated

Many firms become wary when investing in other countries because of the uncertainty caused by the fluctuating currencies in the EU. Investment would rise in the EMU area as the currency is universal within the area, therefore the anxiety that was previously apparent is there no more.

Single currency in single market makes sense:

Trade and everything else should operate more effectively and efficiently with the Euro. Single currency in a single market seems to be the way forward.

Increased Trade and reduced costs to firms:

Proponents of the move argue that it brings considerable economic trade through the wiping out of exchange rate fluctuations, but as well as this it helps to lower costs to industry because companies will not have to buy foreign exchange for use within the EU. For them, EU represents the completion of the Single European Market. It is vital if Europe is to compete with the other large trading blocs of the Far East and North America.

DISADVANTAGES OF EUROCURRENCY MARKET:

The instability of the system.

Throughout most of the 1980s the UK refused to join the ERM (Exchange rate mechanism). It argued that it would be impossible to maintain exchange rate stability within the ERM, especially in the early 1980s when the pound was a petro-currency and when the UK inflation rate was consistently above that of Germany.

When the UK joined the ERM in 1990 there had been three years of relative currency stability in Europe and it looked as though the system had become relatively robust. The events of Sept. 1992, when the UK and Italy were forced to leave the system, showed that the system was much less robust than had been thought.

Overestimation of Trade benefits.

Some economists argue that the trade and cost advantages of EMU have been grossly over estimated. There is little to be gained from moving from the present system which has some stability built into it, to the rigidities which EMU would bring.

Loss of Sovereignty.

On the political side, it is argued that an independent central bank is undemocratic. Governments must be able to control the actions of the central banks because Governments have been democratically elected by the people, whereas an independent central bank would be controlled by a non elected body. Moreover, there would be a considerable loss of sovereignty. Power would be transferred from London to Brussels.

This would be highly undesirable because national governments would lose the ability to control policy. It would be one more step down the road towards a Europe where Brussels was akin to Westminster and Westminster akin to a local authority

CONTENTS
SR NO 1 2 3 4 5 6 7 8 9 10 11 12 13 14 Introduction to Recruitment and Selection Aims of Recruitment and Selection Objectives of Recruitment and Selection Recruitment Recruitment Process Recruitment planning & Factors Selection Recruitment and Selection in Essar shipping company Sources and Steps Selection Process Sourcing of suitable candidates Swot analysis of Essar shipping company Conclusion Bibliography TOPICS PG. NO 2 3 4 5 7 8 17 28 29 31 35 37 39 40