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|  |

Introduction

|  is a single currency which was launched on


1st Jan¶99. (with 11 of 15 member countries of the
European Union participating in the experiment) .

„ow | (¼) is the official currency of 16 of the 27


member states of the European Union (EU). These 16
states include some of the most technologically
advanced countries of the European continent and are
collectively known as the Eurozone. The Euro is an
important international reserve currency. Euros have
surpassed the US dollar with the highest combined
value of cash in circulation in the world.

The Euro was recognized in the Maastricht Treaty in 1992.

The name ›  was officially adopted on 16 December 1995.

The euro was introduced to world financial markets as an


accounting currency on 1 January 1999, replacing the former
European Currency Unit (ECU) at a ratio of 1:1.
The currency was introduced initially in non-physical forms,
such as travelers' checks and electronic banking.

Euro coins and banknotes entered circulation on 1 January


2002.

The Euro is administered by the European Central Bank (ECB)


based in Frankfurt, and the Eurosystem, comprising of the
various central banks of the Eurozone nations.

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 In economics, an optimum currency area (or region) (OCA, or OCR) is a


geographical region in which it would maximize economic efficiency to have the
entire region share a single currency.
 The most obvious benefit of adopting a single currency is to remove the cost of
exchanging currency, theoretically allowing businesses and individuals to
consummate previously unprofitable trades. For consumers, banks in the
Eurozone must charge the same for intra-member cross-border transactions as
purely domestic transactions for electronic payments (e.g., credit cards, debit
cards and cash machine withdrawals).
 The absence of distinct currencies also removes exchange rate risks. The risk of
unanticipated exchange rate movement has always added an additional risk or
uncertainty for companies or individuals that invest or trade outside their own
currency zones. Companies that hedge against this risk will no longer need to
shoulder this additional cost. This is particularly important for countries whose
currencies had traditionally fluctuated a great deal, particularly the
Mediterranean nations.
 Financial markets on the continent are expected to be far more liquid and
flexible than they were in the past. The reduction in cross-border transaction
costs will allow larger banking firms to provide a wider array of banking
services that can compete across and beyond the Eurozone.
Effect of the Euro on Other Currencies

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There are number of factors which will affect the Euro¶s Exchange rate.
These factors can be divided into two categories;-
1 European internal factors.
2 External factors.

European internal factors.


In the medium term, exchange rates are determined principally by
fundamental economic factors as growth, inflation, productivity, budget,
balances, current balances, and the relative supply of domestic & foreign
assets.
The independence of the European Central Bank (ECB) and a budgetary
policy designed to avoid excessive deficits constitute the foundations on
which the monetary policy aimed at maintaining stability and sustainable
growth will be based. An internal policy mix combining price stability and
budgetary discipline would mean that there would be neither upward nor
downward pressures on the euro¶s exchange rate.
External factors:
Inte nati nal s ly  and demand   e s as  sed t d lla s:
The impact of portfolio movements on the euro¶s exchange rate could be
limited, firstly because there will be opposing trends, reallocations in
favour of the euro by non-European investors attracted by the European
financial market, aiming to diversify their risks. Secondly, a diversification
of international portfolios away from the dollar has already been underway
since the beginning of the 1980s and reallocations in favour of the euro are
likely to occur only gradually since economic agents have to be convinced
of the euro¶s intrinsic qualities.
As regards international foreign exchange reserves, a movement towards
the euro could occur, principally in the Central and Eastern European
countries, although that movement is likely to be gradual and its impact on
the euro¶s exchange rate would still be limited given the relatively minor
economic importance of those countries . There is also a risk of surplus
dollars in the ECB¶s official reserves, which could lead to a depreciation of
the dollar. However, that surplus will probably be disposed of gradually in
order to avoid turbulence on the foreign exchange market.
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Currencies Country
 ÷ustrian chilling ÷ustria
 Belgian Franc Belgium
 Dutch Guilder Netherlands
 Finnish Markka Finland
 French Franc France
 German Mark Germany
 Irish ©unt Ireland
 Italian Lira Italy
 Luxembourg Franc Luxembourg
 ©ortuguese Escudo ©ortugal
 panish ©eseta pain
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DE©O ITORY RECEI©T
 ÷ negotiable financial instrument issued by a
bank to represent a foreign company's
publicly traded securities. The depositary
receipt trades on a local stock exchange.
 Depositary receipts make it easier to buy
shares in foreign companies because the
shares of the company don't have to leave
the home state.
÷merican Depositary Receipt ʹ ÷DR
 ÷ negotiable certificate issued by a Y. . bank representing a specified
number of shares (or one share) in a foreign stock that is traded on a Y. .
exchange.
 ÷DRs are denominated in Y. . dollars, with the underlying security held
by a Y. . financial institution overseas.
 ÷DRs help to reduce administration and duty costs that would otherwise
be levied on each transaction.
 This is an excellent way to buy shares in a foreign company
while realizing any dividends and capital gains in Y. . dollars. However,
÷DRs do not eliminate the currency and economic risks for the
underlying shares in another country.
 For example, dividend payments in Euros would be converted to Y. .
dollars, net of conversion expenses and foreign taxes and in
accordance with the deposit agreement.
 ÷DRs are listed on either the NY E, ÷MEX or Nasdaq.
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 ÷ GDR is very similar to an ÷merican Depositary Receipt (÷DR).
Global Depositary Receipt ʹ GDR
 ÷ bank certificate issued in more than one country for shares
in a foreign company. The shares are held by a foreign
branch of an international bank. The shares trade as
domestic shares, but are offered for sale globally through
the various bank branches.
 ÷ financial instrument used by private markets to raise
capital denominated in either Y. . dollars or euros.
 ÷ GDR is very similar to an ÷merican Depositary Receipt.
 These instruments are called EDRs when private markets are
attempting to obtain Euros.
EVOLYTION OF EYRO M÷RKET
 History
 !950s. Eastern Europeans, fearing Y. . seizure of their dollars to
reimburse Y. . citizens for property expropriated by their governments,
deposited them in foreign banks (mostly in London).

Other events:
 Britain ʹ 1957 prohibited banks from financing non-British trade.
 Y. . ʹ 1960s discouraged banks from lending to non-Y residents.
 Oil crisis ʹ 1970s led to huge amount of dollars amassed by O©EC
countries. They did not want them to be in the Y because they
were afraid that they would be confiscated by the Y
government.
 Gave opportunity to those who wanted to deposit or borrow dollars
(later,other currencies, as well).
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INTERE T R÷TE IN GLOB÷L MONEY M÷RKET
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Rate of
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 ÷ short-term discount instrument that usually arises in the course of
international trade.
DE©O ITORY RECEI©T
 ÷ negotiable financial instrument issued by a bank to represent a foreign
company's publicly traded securities. The depositary receipt trades on a local
stock exchange.
 Depositary receipts make it easier to buy shares in foreign companies because
the shares of the company don't have to leave the home state.
Global Depositary Receipt ʹ GDR
 ÷ bank certificate issued in more than one country for shares in a foreign
company. The shares are held by a foreign branch of an international bank.
The shares trade as domestic shares, but are offered for sale globally through
the various bank branches.
 ÷ financial instrument used by private markets to raise capital denominated in
either Y. . dollars or euros.
 ÷ GDR is very similar to an ÷merican Depositary Receipt.
 These instruments are called EDRs when private markets are attempting to
obtain Euros.
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