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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.
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.
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
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.
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
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 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
Fixed-Rate Bonds
These are fixed interest bearing securities
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
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
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
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)
Contd
Interest Rate: 1/8 % below LIBOR Tranche CD: carries different rates of interest for each tranche
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
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
Risks Involved