1. Presented To: Presented By:
Dr. Vishaka Kutumble Surabhi Kaushal
Dolly Samuel
MIB 3RD sem

2. Euro Currency Market
 Any freely convertible currency, such as $, € or , Yen
deposited in a bank outside its country of origin.
 It is the residency of the bank and not its nationality that
determines the “euro” nature of the deposit.
 The most important international financial markets today.
 Composed of euro banks who accept/maintain deposits of
foreign currency
 Dominant currency: US$

3. WHAT IS EURODOLLAR
 By Euro-dollars is meant all U.S. dollar deposits in banks
outside the United States, including the foreign branches
of U.S. banks.
 A Euro-dollar is, however, not a special type of dollar. It
bears the same exchange rate as an ordinary U.S. dollar has
in terms of other currencies.
 Euro-dollar transactions are conducted by banks not
resident in the United States.
 For instance, when an American citizen deposits (lends)
his funds with a U.S. Bank in London, which may again be
used to make advances to a business enterprise in the U.S.,
then such transactions are referred to as Euro-dollar
transactions. All Euro-dollar transactions are, however,
unsecured credits.

4. Contd..
The Euro-dollar market has two facets:
 (i) It is a market which accepts dollar deposits from
the non-banking public and gives credit in dollars
to the needy non-banking public.
 (ii) It is an inter-bank market in which the
commercial banks can adjust their foreign
currency position through inter-bank lending and
borrowing.

5. ORIGINS OF THE EURO-DOLLAR
MARKETS
 Euro-dollars have come into existence on account of
the Regulation issued by the Board of Governors of the
U.S. Federal Reserve System, which does not permit
the banks to pay interest to the depositors above a
certain limit. As such, banks outside the United States
tend to expand their dollar business by offering higher
deposit rates and charging lower lending rates, as
compared to the banks inside the U.S.

6. Creation and Multiplication of Euro credits
US$ deposit in London-based US Bank
or in any European bank
American
investors LIBOR LONDON
USA EUROBANK
Payment to
US company
Euro-credit Payment to
European
company
Company Borrower
PARIS

7. EXAMPLE
 German firm sells medical equipment to institutional
buyer in the US. It receives a US$ check drawn on
Citicorp, NY. Initially this check is deposited in a
checking account for dollar working capital use. But to
earn a higher return (or rate of interest) on the $ 1
million the German firm decides to place the funds in
a time deposit with a bank in London, UK.

8. FACTORS CONTRIBUTING TO THE
GROWTH OF EURO MARKET
Relaxation of exchange control and resumption of currency
convertibility.
 The general relaxation of exchange control , the stability of the
exchange market and the redemption of the currency
convertibility in western Europe in 1958 provided an added
impetus to the growth of the euro market .
The political factors
 The cold war between the United states and the
communist countries also contributed to the euro currency
market.
Balance of payment deficit of the US
 Deficit in the balance of payment in US meant an increasing
flow of US dollar to those countries which had a surplus with the
US

9. Contd…..
The regulation of Q
 Regulation of Q which fixed the maximum rate of interest
payable to the banks in US and the prohibition
of payment of interest on deposit for less than 30 days very
significantly contributed to the fast growth of the euro market.
Innovative banking
 The advent of the Innovative banking ,spearheaded by the US
banks in Europe and the willingness of the banks in the market
to operate on a narrow basis also encouraged the growth of euro
market.
Supply of petrodollars
 The flow of petro dollar facilitated by the increase in
the OPEC’S oil revenue following by the oil price hike since 1973
has been a significant source of growth of Euro currency.

10. Borrowing instruments in the
Euromarkets Banks’ Claims
 Euro credits: medium to long-term loans denominated
in euro-currencies (> 1 year)
 Stand-by Credit: A commitment to lend up to a
specified amount for a specific period, to be used only
in a certain contingency. (commitment fee paid on the
unused portion of a facility)
 Euro-commercial paper: short-term euro notes issued
by companies < 365 days. Nominal value of notes >
$500,000, with corporate and sovereign issuers.
Investment grade rating not required. Euro notes are
unsecured debt securities <1 year

11. TYPES OF TRANSACTION
 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

12. BENEFITS OF EURO DOLLAR MARKET
 Following benefits seem to have accrued to the countries
involved in the Euro-dollar market:
 1. It has provided a truly international short-term capital
market, owing to a high degree of mobility of the Euro-
dollars.
 2. Euro-dollars are useful the financing of foreign trade.
 3. It has enabled the financial institutions to have greater
flexibility in adjusting their cash and liquidity positions.
 4. It has enabled importers and exporters to borrow dollars
for financing trade, at cheaper rates than otherwise
obtainable.

13. CONTD…
 5. It has helped in reducing the profit margins
between deposit rates and lending rates.
 6. It has enhanced the quantum of funds available
for arbitrage.
 7. It has enabled monetary authorities with
inadequate reserves to increase their reserves by
borrowing Euro-dollar deposits.
 8. It has enlarged the facilities available for short-
term investment.
 9. It has caused the levels of national interest rates
more akin to international influences.

14. Effects of Euro-dollar Market on
International Financial System:
Euro-dollar market has affected the international financial
system in the following ways:
 1. The position of dollar has been strengthened
temporarily, since its operations of borrowing of dollars has
become more profitable rather than its holdings.
 2. It facilitates the financing of balance of payments
surpluses and deficits. Especially, countries having deficit
balance of payments tend to borrow funds from the Euro-
dollar Market, thereby, lightening the pressure of their
foreign exchange reserves.
 3. It has promoted international monetary cooperation.
 4. Over the last decade, the growth of Euro-dollar has
helped in easing of the world liquidity problem.

15. Shortcomings of the Euro-dollar
Market
The Major drawbacks of the Euro-dollar market may be
mentioned as under;
 1. It may lead banks and business firms to over-trade.
 2. It may weaken discipline within the banking
communities.
 3. It involves a grave danger of sudden large-scale
withdrawal of credits to a country.
 4. It has rendered official monetary policies less
effective for the countries involved.