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 bankscalled Eurobanksthat 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 40 30 20 10 0 1979 1980 1981 1982 1983 1984 other Eurobnds EuroDM bonds Eurodollar bonds

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
Demand deposit Leksell AB +$1M in Citibank

Leksell AB
Demand deposit +$1M

Contd .

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

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

Contd .

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

Source : Multinational Financial Management By Shapiro

Thank You