Term Paper
On
Eurocurrency Market
Submitted To The Partial Fulfillment of The Requirement
Of
Master of Commerce
MCM. 572: International Financial Management
Submitted by:
Submitted to:
Abhimanyu Sahoo
Dr. A Eronimus
Reg. no: 20mcomrc01
Assistant Professor
M.com, Fourth Semester
Department of Financial Administration
School of Management
Central University of Punjab, Bathinda
CONTENTS
1. Introduction
2. Eurocurrency Market
3. History of Eurocurrency
4. Growth of Eurocurrency Market
5. Eurocurrency Network
6. Characteristics of the Eurocurrency market
7. Examples of Eurocurrency Market
8. Kinds of Eurocurrency Markets
9. Eurocurrency Benefits
10. Eurocurrency's Disadvantages
11. Important Aspects in Eurocurrency
12. Conclusion
References
1. Introduction
The Euro currency market is the money market for currency that is not legal tender in the
country where it is issued. The Eurocurrency market is used by banks, multinational
corporations, mutual funds, and hedge funds. They wish to circumvent the same regulatory
standards, tax laws, and interest rate ceilings seen in domestic banking. The term "Euro
currency" is a generalization of the Eurodollar and should not be confused with the euro, the
European Union's currency. Not only in Europe, but in many other financial centres throughout
the world, there is a demand for Euro currency (Anjaneyulu, 2022).
2. Eurocurrency Market
Many people are confused by the term "Euro" because it refers to a currency that is used for
financial transactions outside of its country of origin. For example, US dollars were referred to
as Eurodollars when they were used to form financial assets and liabilities (denominated in
dollars) but traded outside of the US, Japanese yen were referred to as Euroyen, German marks
were referred to as Euromarks, and Swiss francs were referred to as Eurofrancs. However, since
the introduction of the 'Euro' as the official currency of the European Monetary Union (also
known as Euroland), Eurocurrency (or Euros) now refers to the European Union's or Euroland's
official currency. The currency that is utilized for financial transactions outside of the country
of origin is no longer known as Eurocurrency. Depending on which currency is used for
financial transactions outside of the country of origin, it is referred to as Eurodollar, Euroyen,
Euromarks, Eurofrancs, and so on. The transactions in Eurodollars, Euroyens, Euromarks, and
other currencies are referred to as 'Euro Markets’ (Egyankosh).
3. History of Eurocurrency
Eurocurrency is thought to have started with the Eurodollar. The Eurodollar was originally a
phrase used to describe how US dollars were placed in European banks, particularly in London.
Following WWII, European banks retained a large amount of USD as the US gave financial
assistance to Europe (ICMA Group, n.d.).
At the time, the fixed exchange rate arrangement allowed additional countries to invest in the
US dollar. As a result of globalisation, the Eurodollar eventually became Eurocurrency. People
all across the world started depositing local cash in international banks outside of Europe.
Eurocurrency is thought to have started with the Eurodollar. The Eurodollar was originally a
phrase used to describe how US dollars were placed in European banks, particularly in London.
Following WWII, European banks retained a large amount of USD as the US gave financial
assistance to Europe.
At the time, the fixed exchange rate arrangement allowed additional countries to invest in the
US dollar. As a result of globalisation, the Eurodollar eventually became Eurocurrency. People
all across the world started depositing local cash in international banks outside of Europe
(Corporate Financen Institute, 2020).
4. Growth of Eurocurrency Market
Since the late 1960s, the Eurocurrency market has grown along essentially the same lines. In
1969, the United States began on a monetary policy of restraint. Because U.S. banks were
unable to increase the interest rate on time deposits, including certificates of deposit, due to
Regulation Q, they saw a significant outflow of funds that were diverted to more profitable
investment options. They went to their London branches and took out large loans from them.
Interest rates in the Eurocurrency market surged rapidly as a result, causing deposits to flow
from the US market to the Eurocurrency market.
The Federal Reserve modified its monetary policy in 1970, largely relaxing Regulation Q time
deposit ceilings. Commercial banks in the United States could once again compete for time
deposits in the domestic market, repaying the majority of their outstanding debts to their
London branches. As a result, Euro-banks were left with liquid cash, but because major
European countries were following monetary tightening policies at the same time, there was
plenty of demand for funds from European borrowers.
The Euro-currency market grew at a breakneck pace until mid-1974, with an estimated growth
rate of more than 40% in 1973 and early 1974 in the section of the market where official
statistics are submitted to the Bank for International Settlements (BIS). As a result, even when
US capital controls were lifted in January 1974, the country's growth remained unabated.
Concerns about the viability of some banks and uncertainty about the market's future slowed
the market's growth sharply by mid-1974, and the market's recently resumed growth has been
at a significantly reduced rate.
5. Eurocurrency Network
The concept of eurocurrency can be interpreted in two ways.
Firstly, it might represent the sum of all the currencies and financial facilities used by the
offshore banking network around the world. This is not restricted to the four eurocurrencies
(the US dollar, the euro, the yen, and the British pound) or their respective home markets. A
Danish bank, for example, would be considered a member of the eurocurrency network if it
chose to preserve Swiss franc holdings in London.
Second, it might refer to the totality of all technologies, including as data processing and
communication lines, that enable global players to engage and participate in the eurocurrency
market. Eurocurrency serves a purpose in the global financial system, with market centres
located all over the world.
6. Characteristics of the Eurocurrency market
The Eurocurrency Market has the following characteristics:
 It is an international market with no national control.
 It is a Short-Term Money Market
 It is a Wholesale Market
 It is a Highly Competitive and Sensitive Market
7. Examples of Eurocurrency Market
Example 1:
The USD-denominated time deposits held at banks outside the United States are the most
visible example of a eurocurrency market. These deposits, sometimes known as "eurodollars,"
have become an important feature of the global financial system as a source of short-term USD
funding for financial institutions all over the world.
Because the US dollar is the world's reserve currency, almost all multinational firms, banks,
and governments require huge amounts of the currency to meet their regular financial
responsibilities. To meet their short-term finance needs, these companies frequently turn to the
eurodollar market. Although accurate estimates of the size of the eurodollar market are difficult
to come by, recent estimates put it at about $14 trillion.
Example 2:
Katsuro, a software developer from Japan, moved to the US for a three-year onshore project.
As soon as he landed, he couldn't hold back his hunger and walked to a nearby shop for a
hamburger. The Yen was refused when he tried to pay for it because it was not an American
currency. He requested his partner to pay for the same when he arrived at the airport to pick
him up.
To avoid such a dilemma in the future, Katsuro deposited the money he had in a US-based
bank and exchanged it for US dollars. In this scenario, the yen is a non-local currency that has
been placed in a bank outside of the country to which it belongs. Katsuro can also utilise his
U.S. dollars to trade for Yen at a U.S.-based bank while visiting his home nation.
8. Kinds of Eurocurrency Markets
The followings are the various kinds of Eurocurrency markets:
a) Eurodollar: Eurodollars were the initial eurocurrency and continue to have the most
power. It's worth mentioning that US banks can operate in other countries and deal in
Eurodollars. Often, these subsidiaries are based in the Caribbean. The majority of actual
trading, however, occurs in the United States. The Eurodollar is mostly traded overnight,
though 12-month deposits and loans are allowed. The average transaction is for $25 million,
although it can reach $1 billion in a single deposit.
b) Euroyen: The offshore euroyen market was founded in the 1980s and has grown in
popularity as Japan's economic power has grown. As Japan's interest rates fell in the 1990s,
the higher returns offered by euroyen accounts became increasingly appealing (World
Bank, n.d.).
c) Eurobond: There is a thriving bond market where governments, corporations, and
financial organisations can borrow in currencies other than their own. In 1963, the Italian
company Autostrade issued the first Eurobond. In a contract negotiated in London and
posted on the Luxembourg stock exchange, it borrowed $15 million for 15 years (Bahceli
& Fonte, 2019).
9. Eurocurrency Benefits
Eurocurrency provides following benefits:
 Useful for International Trade: One of the reasons for the expansion in the international
short-term capital market is the Eurocurrency. It's also important for funding international
trade because it allows traders to import and export using less expensive means.
 Increased adaptability: Financial firms can modify their cash/liquidity situations more
easily with the Eurocurrency.
 Arbitrage financing: The Eurocurrency contributes to the increase in the amount of money
accessible for arbitrage.
10. Eurocurrency's Disadvantages
Eurocurrency have following drawbacks:
 Financial discipline has deteriorated: Naturally, because it is unregulated by the
currency's home country, it erodes banking community discipline and lowers the value of
the native currency. It also refers to residents' spending habits, which may also include a
surge in overseas spending as a result of the Eurocurrency market's ease and comfort.
 Excessive credit risk: Tension might occur as a result of local banks' overextension of
dollar credit and the potential for large-scale credit withdrawals in a country.
 Destabilization of the exchange rate: By putting pressure on foreign exchange prices and
foreign exchange reserves, the market can cause instability.
11. Important Aspects in Eurocurrency
Deposit interest rates in the Eurocurrency market are often higher than on the domestic market.
This is due to the fact that the depositor is not covered by the same national banking legislation
and does not have government deposit insurance. Tariffs on Eurocurrency loans are often
cheaper for the same reasons that they are on domestic loans. The same reserve requirements
do not apply to Eurocurrency bank accounts as they do to domestic accounts (Anjaneyulu,
2022).
The most significant advantage of Euro currency markets is their increased competitiveness.
At the same time, they will cut interest rates for borrowers while increasing interest rates for
lenders. This is primarily due to the lack of regulation in the Eurocurrency markets.
Eurocurrency markets, on the other hand, are more vulnerable (Anjaneyulu, 2022).
12. Conclusion
Eurocurrency markets were a symbol of financial integration and interdependence in a
globalizing economy, and they played an important role in the distribution and creation of
international liquidity. They can simultaneously offer borrowers reduced interest rates while
charging lenders higher interest rates. This is primarily due to the fact that eurocurrency
markets are less controlled. On the negative, eurocurrency markets are more vulnerable,
particularly during a bank run. At the same time, because of the consequences for
macroeconomic policies and financial stability, their rapid rise has been a source of concern
for central bankers and policymaker.
References
Anjaneyulu. (2022, March 11). Eurocurrency Market. Retrieved March 31, 2022, from cleartax:
https://cleartax.in/g/terms/eurocurrency-market
Bahceli, Y., & Fonte, G. (2019, Octobe 9). Italy raises $7 billion with first U.S. dollar bond since
2010. Retrieved March 31, 2022, from www.reuters.com: https://www.reuters.com/article/usitaly-bonds/italy-raises-7-billion-with-first-u-s-dollar-bond-since-2010-idUSKBN1WO2A8
Corporate Financen Institute. (2020, November 16). Eurocurrency. Retrieved March 31, 2022, from
https://corporatefinanceinstitute.com/resources/knowledge/finance/eurocurrency/
Egyankosh. (n.d.). International Financial Market. Egyankosh. Retrieved March 31, 2022, from
https://egyankosh.ac.in/bitstream/123456789/12151/1/Unit-2.pdf
ICMA Group. (n.d.). History of the Eurobond Market. Retrieved March 31, 2022, from
www.icmagroup.org: https://www.icmagroup.org/About-ICMA/history/history-of-theeurobond-market/
World Bank. (n.d.). Real interest rate (%)- Japan. Retrieved March 31, 2022, from
data.worldbank.org: https://data.worldbank.org/indicator/FR.INR.RINR?locations=JP