Euro Currency Market

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Topic Euro Currency Market Index 1. Euro Introduction EURO INTRODUCTION The euro (sign: €; code: EUR) is the currency used by the Institutions of the European Union and is the official currency of the eurozone, which consists of 17 of the 27 member states of the European Union: Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Malta, the Netherlands, Portugal, Slovakia, Slovenia, and Spain. The currency is also used in a further five European countries and consequently used daily by some 332 million Europeans. Additionally, more than 175 million people worldwide— including 150 million people in Africa—use currencies pegged to the euro. 1 Euro ευρώ (Greek) €1 coin ISO 4217 code EUR (num. 978) Central bank European Central Bank Website www.ecb.europa.eu Official user(s) Eurozone (17) Outside the EU (7) Unofficial user(s) 4 other users Inflation 1.4%, December 2012 Method HICP Pegged by 10 currencies Symbol Nickname The single currency Plural Euro linguistic issues Coins 1c, 2c, 5c, 10c, 20c, 50c, €1, €2 Banknotes €5, €10, €20, €50, €100, €200, €500

description

Euro

Transcript of Euro Currency Market

Page 1: Euro Currency Market

Topic

Euro Currency Market

Index

1. Euro Introduction

EURO INTRODUCTION

The euro (sign: €; code: EUR) is the currency used by the Institutions of the European Union and is the official currency of the eurozone, which consists of 17 of the 27 member states of the European Union: Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Malta, the Netherlands, Portugal, Slovakia, Slovenia, and Spain. The currency is also used in a further five European countries and consequently used daily by some 332 million Europeans. Additionally, more than 175 million people worldwide—including 150 million people in Africa—use currencies pegged to the euro.

The euro is the second largest reserve currency as well as the second most traded currency in the world after the United States dollar. As of September 2012, with more than €915 billion in circulation, the euro has the highest combined value of banknotes and coins in circulation in the world, having surpassed the US dollar. Based on International Monetary Fund estimates of

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Euroευρώ (Greek)

€1 coinISO 4217 code EUR (num. 978)Central bank European Central Bank

Website www.ecb.europa.eu

Official user(s) Eurozone (17) Outside the EU (7)

Unofficial user(s)

4 other users

Inflation 1.4%, December 2012Method HICP

Pegged by 10 currenciesSymbol €

Nickname The single currency Plural Euro linguistic issues

Coins 1c, 2c, 5c, 10c, 20c, 50c, €1, €2

Banknotes €5, €10, €20, €50, €100, €200, €500

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2008 GDP and purchasing power parity among the various currencies, the euro zone is the second largest economy in the world.

The name euro 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 (US$1.1743). Euro coins and banknotes entered circulation on 1 January 2002. While the euro dropped subsequently to US$0.8252 within two years (26 October 2000), it has traded above the US dollar since the end of 2002, peaking at US$1.6038 on 18 July 2008. Since late 2009, the euro has been immersed in the European sovereign-debt crisis which has led to the creation of the European Financial Stability Facility as well as other reforms aimed at stabilizing the currency. In July 2012, the euro fell below US$1.21 for the first time in two years, following concerns raised over Greek debt and Spain's troubled banking sector.

ORIGIN OF EURO

The euro came into existence on 1 January 1999, although it had been a goal of the European Union (EU) and its predecessors since the 1960s. After tough negotiations, particularly due to opposition from the United Kingdom, the Maastricht Treaty entered into force in 1993 with the goal of creating economic and monetary union by 1999 for all EU states except the UK and Denmark (even though Denmark has a fixed exchange rate policy with the euro).

In 1999 the currency was born virtually and in 2002 notes and coins began to circulate. It rapidly took over from the former national currencies and slowly expanded behind the rest of the EU. In 2009 the Lisbon Treaty formalized its political authority, the Euro Group, alongside the European Central Bank.

WHAT IS EUROCURRENCY MARKET?

Eurocurrency is money in the form of bank deposits of a currency outside the country that issued the currency. Eurocurrency is the term used to describe deposits residing in banks that are located outside the borders of the country that issues the currency the deposit is denominated in. It is a market for borrowing and lending of currency at the center outside the country. Euro is a single currency which was launched on 1st Jan, 1999. It is an important international reserve currency. Euro is administered by the European Central Bank. This currency is used daily by some 327 million Europeans. Eurodollar or Eurocurrency refers to bank time deposits in a foreign currency.

For example: a deposit denominated in US dollars residing in a Japanese bank is a Eurocurrency deposit, or more specifically a Eurodollar deposit.

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INTRODUCTION TO EUROCURRENCY MARKET

It is a market for Borrowing and Lending of currency at the center outside the country in which the currency is issued. It is different than the Foreign Exchange Market, wherein the currency is bought and sold. Euro (€) is a single currency which was launched on 1st Jan, 1999. (With 11 of 15 member countries of the European Union participating in the experiment).Now Euro (€) 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 Euro zone. 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 name euro 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 bank in Euro coins and bank notes entered circulation on 1 January 2002.The Euro is administered by the European Central Bank (ECB) based in Frankfurt, and the Euro system, comprising of the various central banks of the Euro zone nations.The states, known collectively as the Eurozone are Austria, Belgium, Cyprus, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Malt a, the Netherlands, Portugal, Slovakia, Slovenia and Spain. The currency is also used in a further five European countries, with and without formal agreements, and is consequently used daily by some 327 million Europeans. Over 175 million people worldwide use currencies which are pegged to the euro, including more than 150 million people in Africa.The most important implications of having a common currency, the Euro, are:

Exchange rate certainty while travelling across Europe No exchange risk and, therefore, no cost of hedging against it No transaction costs Increased transparency and fewer transactions for importers and exporters Increased liquidity in the ‘United Euro’ financial market

DefinitionThe money market in which Eurocurrency, currency held in banks outside of the country where it is legal tender, is borrowed and lent by banks in Europe. The Eurocurrency market is utilized by large firms and extremely wealthy individuals who wish to circumvent regulatory requirements, tax laws and interest rate caps that are often present in domestic banking, particularly in the United States.

The Eurocurrency market allows for more convenient borrowing, which improves the international flow of capital for trade between countries and companies. For example, a Japanese company borrowing U.S. dollars from a bank in France is using the Eurocurrency market.

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The market where financial banking institutions provide banking services denominated in foreign currencies. They may accept deposits and provide loans. Unlike Euro credit markets, however, loans in this market are made short-term.

The money market in which Eurocurrency, currency held in banks outside of the country where it is legal tender, is borrowed and lent by banks in Europe.

HISTORY

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 concept does not have anything to do with the European Union or the banks associated with the member countries, although the origins of the concept are heavily derived from the region. Instead, 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.

The Eurocurrency Market has its roots in the World War II era. While the war was going on, political challenges caused by the takeover of the continent by the Axis Powers meant that there was a limited marketplace for trading in foreign currency. With no friendly government operations within the European marketplace, the traditional economies of the nations were displaced, along with the currencies. To combat this, especially due to the fact that many American companies were tied to the well-being of business behind enemy lines, banks across the world began to deposit large sums of foreign currency, creating a new money market.

One of the factors that make the Eurocurrency Market unique compared to many other money market accounts is the fact that it is largely unregulated by government entities. Since the banks deal with a variety of currencies issued by foreign entities, it is difficult for domestic governments to intervene, particularly in the United States. However, with the establishment of the flexible exchange rate system in 1973, the Federal Reserve System was given powers to stabilize lending currencies in the event of a crisis situation. But one problem that arises is that these crises are not defined by the regulations, meaning that intervention must be established based on each case and the Federal Reserve must work directly with central banks around the world to resolve the matter. This adds to the volatility of the Eurocurrency Market.

Despite its name, the Eurocurrency Market is primarily influenced by the value of the American dollar. Nearly two-thirds of all assets around the globe are represented by U.S. currency. The challenge with foreign banks revolves around the fact that regulations enforced by the Federal Reserve are really only enforceable within the U.S. The taxation level and exchange rate of the American dollar varies depending on the nation. For example, an American dollar in Vietnam is worth more than it is in Canada, further influencing the market.

Emergence of Euro markets:

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1. During the 1950s, the erstwhile USSR was earning dollars from the sale of gold and other commodities and wanted to use them to buy grain and other products from the West, mainly from the US. However, they did not want to keep these dollars on deposit with banks in New York, as they were apprehensive that the US government might freeze the deposits if the cold war intensified. They approached banks in Britain and France who accepted these dollar deposits and invested them partly in US.

2. Domestic banks in US (as in many other countries) were subjected to reserve requirements, which meant that a part of their deposits were locked up in relatively low yielding assets.

3. The importance of the dollar as a vehicle currency in international trade and finance increased, so many European corporations had cash flows in dollars and hence temporary dollar surpluses. Due to distance and time zone problems as well as their greater familiarity with European banks, these companies preferred to keep their surplus dollars in European banks, a choice made more attractive by the higher rates offered by Euro banks.

The main factors behind the emergence and strong growth of the Eurodollar markets were the regulations on borrowers and lenders imposed by the US authorities who motivated both banks and borrowers to evolve Eurodollar deposits and loans Added to this are the considerations mentioned above, viz. the ability of Euro banks to offer better rates both to the depositors and the borrowers and convenience of dealing with a bank that is closer to home, which is familiar with business culture and practices in Europe. The origin of the Eurocurrency market is that the market in currency trading outside their respective domestic economy. Several factors were behind their birth:

(1).the centrally planned economies were reluctant to hold bank deposits in the United States, so they put their dollar earnings on deposit in London. Gradually other European dollar holders did the same, a tendency that was particularly marked when the United States ran large balance of payments deficits.

(2).balance of payments pressures made the United Kingdom government limit British banks’ external use of sterling, so they had a strong incentive to develop business in foreign currencies.

(3). by the end of 1958 the main industrial countries had restored full convertibility of their currencies. The new freedom produced a surge of international banking business. The growth of the Eurocurrency market was also stimulated by certain monetary regulations in the United States. For instance, Regulation Q put a ceiling on the interest rates that banks operating in the United States could offer to domestic depositors were naturally attracted to Euro banks that were not bound by Regulation Q. In addition, banks in the United States were required to hold non-interest-bearing reserves. By diverting dollar deposits to their offshore branches or subsidiaries, U.S. banks were able to avoid tying up so much of their funds in reserve requirements at a zero rate. General controls on the movement of capital also helped to boost the Eurocurrency markets. One example was the introduction, in 1965, of the Voluntary Foreign Credit Restraint Program (VFCR) in the United States. The specific goal of the VFCR was to limit the growth of foreign lending by U.S. banks. Instead, their foreign branches-which were not subject to the VFCR- took deposits and on lent them outside the ceiling. Between 1964 and 1973 the number of U.S. banks with overseas branches increased from 11 to 125. The number of branches increased from 181 to 699 over the same period. At the end of the 1960s and during the early 1970s the Eurocurrency markets, which had been located in Western Europe (and centered in London), expanded to a number of other

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Features of the Market

The following are the special features of the Eurocurrency market:

1. Transactions in each currency take place outside the country of its issue. For example, dollars earned by a Japanese firm from exports may be deposited with a bank in London. The London bank is free to use the funds for lending to any other bank. The bank may use it for lending to French Bank. Thus the utility of the currency is entirely outside the control of the central bank of the country issuing the currency. For this reason, Euro currencies are also referred to as offshore currencies.

2. Even though the currency is utilized outside the country of its origin, it has to be held only in the country of its issue. For example, the Japanese firm deposits its dollar earnings with the bank in London. The London bank will keep the funds in a New York bank in its own name. When the London bank lends the amount to the French bank, it will give suitable instructions to the New York bank. On receipt of the instructions, the New York bank will debit the account of the London bank and credit it to the account of the French bank. Thus ultimately the settlement of all dollars transactions takes place in New York. Similarly, settlement of all Euro sterling transactions is made in London.

3. Though Eurocurrencies are outside the direct control of the monetary authorities of the irrespective countries of issue, they are subject to some form of indirect control. This is because the settlement of all transactions has to take place only in the country of issue. If the country of issue imposes any restrictions, the conversion of balances in the currency held outside the country into another currency will also be effected. As already stated conversion into another currency would involve clearing in the country of issue at some point of transaction. This automatically subjects them to the restriction.

4. Eurocurrency market is not a foreign exchange market. It is a market for deposits with and between banks (Inter-bank deposits) and for loans by banks to the non-bank public. It is a market in which foreign currencies are lend and borrowed as distinct from the foreign exchange market, where they are bought and sold. It consist of a pool of predominantly short term deposits which provide the biggest single source of funds that commercial banks transform into medium and occasionally log-term international loans or Euro credits.

5. The transactions in the market involve huge amounts running into millions of dollars. The large- scale financing has led to the development of syndications of loans, where a large number of banks participate in the lending operations.

6. Eurocurrency market is a highly competitive market with free access for new institutions in the market. Consequently, the margin between the interest rates on deposits and advances has narrowed down considerably.

7. A special feature is the concept of ‘floating rates of interest’. The rate of interest is linked to a base rate, usually the London Inter-Bank Offered Rate (LIBOR). The interest on the depositor the advance would be reviewed periodically and changed in accordance with change, if any, LIBOR.

8. US dollar remains the leading currency traded in the Eurocurrency market, even though its share is declining. Other currencies traded in the market on large scale are Deutsche mark, Japanese Yen, Pound Sterling and Swiss Franc.

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9. The Eurocurrency market can broadly be divided into four segments:i. Euro credit markets, where international group of banks engage in lending

for medium and long term;ii. Euro bond market, where banks raise funds on behalf of international

borrowers by issuing bonds; andiii. Eurocurrency (deposits) market, where banks accept deposits, mostly for

short term;iv. Euro notes market, where corporate raise funds

Factors for its Emergencea. Strict rules in the domestic marketb. Lack of Govt. controls on credit allocation & interest rates.c. No taxes and prior commitmentsd. No need to maintain Reserve Requiremente. Operates on the basis of market forcesf. Low operating margins, high turnovers

Characteristicsi. International Money market free from govt. regulations

ii. Exist as a savings and time depositiii. Exists for short term which makes difficult to manage riskiv. Participants- Govt., Public Sector Organizationsv. Euro dollar market dominates other currencies

FEATURES EURO CURRENCY MARKET:

1. Types of transactions2. Control of the country of issue of the currency3. Huge amounts of transactions4. Highly competitive Market5. Floating rates of interest based on LIBOR6. Dominance of Dollar denominated transactions7. Four different segments

Types of transactions:

Japanese Exporter, earning USD, keeps this 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.

Huge amounts of transactions:

Generally they are in only millions of USD. This has lead to Syndication of loans, where large numbers of banks participate in the lending operations. It also consists of pool of large number of short term deposits, which provides the biggest single source of funds for commercial banks.

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Highly competitive Market:

There are no entry barriers. There is free access to the new institutions in the market. The lending rates are low and deposit rate are high, thus allowing a wafer thin margin for operations. Consumers, i.e. investors and borrowers derive advantage out of this situation.

Floating rates of interest based on LIBOR:

The rate of interest in the market is linked to the Base Rate usually LIBOR, i.e. London Inter-Bank Offered Rate .The rate of interest on advances and deposits is reviewed periodically and amended according to changed circumstances, if any in LIBOR

Dominance of Dollar denominated transactions:

Dollar is a leading currency traded in the market (about 90% to 95% market share).However other currencies are now emerging thus reducing the role of dollar somewhat (about 80% market share)

Euro Japanese Yen Pound Sterling

FACTORS CONTRIBUTED TO THE GROWTH OF EURO CURRENCY

1. 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.

2. The Political Factors.The cold war between the United States and the communist countries also contributed to the euro currency market.

3. 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.

4. 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.

5. 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.

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6. 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.

COUNTRIES RESPONSIBLE FOR THE GROWTH OF THE EURO-CURRENCY MARKET

China (fear that its Fx in USD would be blocked), USA (indeed blocked identifiable Fx in USD in 1950, federal Reserve Act, regulation ‘Q’ and ’M’; control and restrictions on borrowing funds in US in 1965, and introduction of interest equalization tax in 1963), Korea (War broke out in 1950), Russia (erstwhile USSR) {because of their banking presence in Paris and London}, and UK (policy of not granting sterling loan outside sterling area in1957).

Segment 1: Euro-Credit Markets Tenure: Medium and Long Term Loans [up to 10--15 years 10% of loans, 5²8 years 85% of loans, 1± 5 years 5% of loans] provided by group of banks.

1. Amount: It is a wholesale sector of the international capital market.2. Security: Loans are provided without any primary or collateral security. Credit

rating is the essence of lending3. Type of loan: A) Revolving [like cash credit]B) Term Credit4. Interest Rate: Generally 1% above the reference rate, rolled over every six moths5. 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 andcomply with the

procedure Common assessment of the borrower and his country Common documentation In very few cases co-financing with IMF or IBRD is possible

Segment 2: 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. Selling of EB is through syndicates of the banks Lead manager advises about size, terms and timing of the issue

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Entire issue is underwritten Lead manager’s fees, underwriting commission and selling commission is somewhere

between 2% and 2.5% of the value of the issue Lead manager allocates the bonds to all members of the selling group at face valueless

their commission Thereafter every member is on his own They can sell to investors at whatever price they can obtain Thus no two investors in the Euro-Bond market need pay the same price for the newly

issued bonds

Features of Euro-Bonds:

Most Euro-Bonds are bearer securities 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:

1. Straight or Fixed Rate Bonds2. Convertible Bonds3. Currency Option Bonds4. Floating Rate Notes

Straight or Fixed Rate Bonds

1. These are fixed interest bearing securities2. Interest is normally payable yearly3. Year is considered of 360 days4. Maturities range from 3 years to 25 years5. Right of redemption before maturity may be there or may not be there6. If the right of redemption is there then redemption is done by offering an agio (premium)

Convertible Bonds

1. These are fixed interest bearing securities2. Investor has an option to convert bonds into equity shares of the borrowing company3. The conversion is done at the stipulated price and during the stipulated period4. Conversion price is normally kept higher than the market price.5. The rate of interest is lower than the rate of interest on comparable straight bond.6. 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.

7. Bonds with warrants: warrant is part of the bond but is detachable and traded separately, when the conversion takes place. The investor can keep the bond and trade the warrant for shares.

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Currency Option Bonds

1. They are similar to straight bonds2. Generally issued in one currency and option to take interest and principal in

another currency.3. 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

Floating Rate Notes

1. FRN is similar to straight bonds with respect to maturity and denomination2. Rate of interest however varies and is based on LIBOR + 1/8%, %, 1.5%........3. Rate of interest is adjusted every six months4. Minimum interest rate clause may be included5. ‘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.6. Generally it is found that banks issue and invest in FRNs

Segment 3: Euro-Currency Deposits

1. Euro-bonds represent the funds amassed by the bank on behalf of international borrower; Euro-currency deposits represent the funds accepted by the bank themselves.

2. The Euro-currency market consists of all deposits of currencies placed with the banks outside their home currency.

3. The deposits are accepted in Euro-currencies, as well as currency cocktails (SDR,ECU etc.)4. The deposits are placed at call (overnight, two days or seven days notice) for USD,

Sterling pounds, Canadian dollars and Japanese Yen; and of two days in any other currencies.5. Time deposits are accepted for periods of 1,3,6 and 12 months for all currencies6. USD and Sterling pound can be placed for a period of five years7. Minimum size of deposit is USD50,000 or its equivalent

Euro-Currency Deposits Certificate of Deposit1. It is negotiable instrument2. They are bearer instrument and can be traded in the secondary market3. Period: 1 year (1 month through 12 months)4. Minimum amount: USD50,0005. Currencies: USD, Sterling Pound, Yen6. Interest Rate: 1/8 % below LIBOR7. Tranche CD: carries different rates of interest for each tranche8. Discount CD: they are issued at discount

Segment 4: Euro-Notes Market

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1. This market constitutes the instruments of borrowing issued by the corporate in the Euro-currency market

2. The instruments issue may be underwritten or may not be underwritten3. The borrowers directly approach the lenders without the intermediation of the banks or

financial institution.4. Instruments are of the following categories:

Commercial Paper Note issuance Facilities Medium Term Notes

Commercial Paper1. It is a promissory note with maturity less than a year, generally the period

varies between 90 days to 180 days2. Generally issue is not underwritten3. Amount: USD 100,000 or equivalent4. Issued on µDiscount to Yield µ basis, but interest rate works out lesser than that is paid

on bank borrowing and higher than that is paid by the bank on deposits5. They are unsecured instrument

Note Issuance Facilities (NIF)

1. Borrowers place short term notes of 3 months to 6 months maturity directly with the investors and the notes are rolled over on maturity

2. The banks underwrite at the time of issue as well as when the notes are rolled over 3. With slight variation they are also known as:

Revolving underwriting facility (RUF) Standby Note Issuance Facility (SNIF) Note Purchase Facility (NPF)

Medium Term Notes MTN represents Long Term, Non Underwritten and fixed interest rate source of raising

finance. It can be comparable with Euro-bonds with a difference that Eurobonds issue is

underwritten, where as MYN issue is not underwritten. Their maturity is somewhere between short term CPs(less than one year) and long term

Euro bonds (more than five years) They are privately placed and have great flexibility

COUNTRIES USING EURO CURRENCY

On January 1, 1999 one of the largest steps toward European unification took place with the introduction of the euro as the official currency in eleven countries (Austria, Belgium, Finland, France, Germany, Ireland, Italy, Luxembourg, Netherlands, Portugal, and Spain).However, residents of the first European Union countries that adopted the euro didn't begin using euro banknotes and coins until January 1, 2002.

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A one-euro coin is shown. The euro is used throughout Europe as an international currency. The symbol of the euro is ¼, the letter "E" with one or two cross lines.

Euro Countries

Today, the euro is one of the world's most powerful currencies, used by more than 320million Europeans in twenty-two countries. The countries currently using the euro are:1) Andorra2) Austria3) Belgium4) Cyprus5) Estonia6) Finland7) France8) Germany9) Greece10) Ireland11) Italy12) Kosovo13) Luxembourg14) Malta15) Monaco16) Montenegro17) Netherlands18) Portugal19) San Marino20) Slovakia21) Slovenia22) Spain23) Vatican City

On January 1, 2009, Slovakia started using the euro. Estonia began using the euro on January1, 2011. Lithuania and Latvia are expected to join the Eurozone in the next few years and thus become countries using the euro. Only 17 of the 27members of the European Union (EU) are part of the Eurozone, the name for the collection of EU countries that utilize the euro. Notably, the United Kingdom, Denmark, and Sweden have thus far decided not to convert to the euro. Other new EU member countries are working toward becoming part of the Eurozone. On the other hand, Andorra, Kosovo, Montenegro, Monaco, San Marino, and the Vatican City are not EU members but do officially use the euro as their currencies.

The Euro - €

The symbol for the euro is a rounded "E" with one or two cross lines - ¼. Euros are divided into eurocents, each eurocent being one one-hundredth of a euro.

EURO (EUR) CURRENCY TRAITS

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The Euro enjoys high liquidity. Additionally, all of the Euro crosses are characterized by great liquidity. The EUR/USD currency pair is the most liquid one among all others.

In January 1, 1999 the introduction of the Euro as an electronic currency was made. This is the time when the pre-EMU currencies were replaced by the Euro. Only the Greece currency was not converted at this time, but instead in January 2001.

The relatively new nature of the Euro has attached to it some risks that cannot be found in other currencies. One of them stems from the ECB, which is viewed as an untested financial institution. The risks come from the fact that the ECB has a short history and has not yet proven its efficacy and efficiency. Since the bank has no long history, market participants don't have background information regarding the way it will act under different market conditions.

Another risk associated with the Euro concerns its susceptibility to political and economic uncertainties. This risk stems from the fact that the Euro is the official currency of 12member states and a change in any one country is reflected in its value.

The Euro sentiment is indicated by the spread between US Treasuries and Bunds. In order to gauge any potential euro exchange rate changes, the ten-year government bonds should be referred to. Euro movements can be indicated by the differential between the 10-year US government bond and the 10-year German Bund. The Euro value is said to be increasing if the Bund rates are greater than the treasury rates and an increase in the differential is observed. Additionally, if the spread widens it may indicate the increase in the value of the EUR. Alternatively, the value of the EUR is decreasing if the differential falls or a tightening of the spread is observed.

The Euribor Rate

The Euribor rate (also known as the Euro interbank offer rate or the 3-Month Interest Rate) represents the interest rate at which large banks offer to one another interbank term deposits. The Eurodollar futures rate and the Euribor futures rate tend to be compared by forex market participants. Eurodollars represent deposits that are placed outside the US and are held in US dollars.When the spread between the Euribors and the Eurodollar future increase, investors tend to direct their assets to European fixed income assets. This is generally so, because investors are attracted by the high yields of assets. On the other hand, if this spread decreases, investors divert their attention from the European assets. This will eventually result in a decrease in the money flows into the EUR.

The movements in the EUR/USD are also influenced by the made Mergers and Acquisitions (M&A). The M&A activity has significantly increased among the EU and the US, which has led to an impact on the value of the EUR on short term basis.

The most important implications of having a common currency, the Euro are:

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Exchange rate certainty while travelling across Europe No exchange risk and, therefore, no cost of hedging against it No transaction costs Increased transparency and fewer transactions for importers and exporters Increased liquidity in the ‘United Euro’ financial market

The Asia Currency Market:

Although dwarfed by its European counterpart, the Asia currency (or Asia dollar) 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 Asia dollar market was founded in1968 as a satellite market to channel to and from the Euro dollar 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 Liabilities

Deposits in other Euro banks Deposits of financial and nonfinancial entities

Working balance in U.S. Bank Call MoneyLoans to financial and nonfinancial entities

Certificates of deposit

Floating Rate Notes

AN EVALUATION OF EURODOLLAR MARKET

Advantages

Increases international liquidity Expands domestic credit creation Act as a ‘Vehicle Currency’ for carrying world trade Globalization increases its importance

Disadvantages

Affects international monetary stability

CONCLUSION

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The development of the International monetary system and foreign exchange market has been significantly influenced by the growth of Eurocurrency Market.

But the advantages and disadvantages associated with the Eurocurrency Market have given rise to the doubt whether it is a welcome tonic or a slow poison to the international system.

BIBLIOGRAPHY

http://www.investopedia.com/terms/e/eurocurrencymarket.asp#ixzz2KWgJVm7I

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