1

A PROJECT ON
EUROCURRENCY MARKET & ITS COMPONENTS
SUBMITTED IN PARTIAL FULFILLMENT OF THE
REQUIREMENT FOR
MASTER OF COMMERCE (M.COM.)
ACCOUNTANCY GROUP
SEMESTER II

IN THE SUBJECT
ECONOMICS OF GLOBAL TRADE AND FINANCE
TO
UNIVERSITY OF MUMBAI
BY
JYOTI PRAKASH MHATRE
ROLL NO. 15A114

UNDER THE GUIDANCE OF

PROF. DR. SUNANDA NARAYANAN

CHETANAS
H. S. COLLEGE OF COMMERCE & ECONOMICS
& SMT KUSUMTAI CHAUDHARI COLLEGE OF ARTS
BANDRA (EAST), MUMBAI 400 051

DECLARATION
I, Jyoti P. Mhatre, student of Master of Commerce (M.Com) Accountancy
Group Semester- II, Roll No. 15A114 of Chetanas H. S. College of Commerce
& Economics & Smt. K. C. College of Arts, (CHETANAS M. COM.
CENTRE)

Bandra (East), Mumbai 400 051, hereby declare that I have

completed the project Eurocurrency Market & Its Components on in the

subject Economics of Global Trade and Finance for the Academic Year 201516.

_________________________
Jyoti Mhatre

Date:

CERTIFICATION
I, Prof. Dr. Sunanda Narayanan hereby certify that Jyoti P. Mhatre, Roll No
15A114 of M.Com. Semester II of Chetanas M.Com Centre, has successfully
completed project on Eurocurrency Market & Its Components in the subject
Economics on Global Trade and Finance for the Academic Year 2015-16.

________________
_________________
Internal Guide

External Guide

________________
__________________
Coordinator

Principal

ACKNOWLEDGEMENT

At this juncture, I would like to express my sincere gratitude to those who

have helped me directly or indirectly during this project.
My sincere thanks to Prof. Dr. Sunanda Narayanan for his whole hearted
support, constructive advice and practical guidance. I would also like to thank
the college library for the reference material and information used.

_________________________
Jyoti P. Mhatre

INDEX
CHAPTER

CONTENT

NO.
1

INTRODUCTION TO INTERNATIONAL FINANCIAL MARKET

CURRENCY MARKETS

MEANING AND SCOPE OF EUROCURRENCY MARKET

REASONS FOR THE DEVELOPMENT OF EUROCURRENCY

MAREKT

ORIGIN, GROWTH AND CREATION OF EUROCURRENCIES

SALIENT FEATURES OF EUROCURRENCY MARKET

INSTRUMENTS OF EUROCURRENCY MARKET

OPERATION AND EFFECTS OF EUROCURRENCY MARKET

ECONOMIC IMPACT

10

EUROBONDS AND ITS TYPES

11

EURO EQUITY

12

EURO CREDITS AND ITS FEATURES

13

DIFFERENCE BEWEEN EUROCREDITS AND EUROBONDS

14

CURRENT SCENARIO OF EUROCURRENCY MARKET

15

CONCLUSION

16

BIBLIOGRAPHY

EXECUTIVE SUMMARY

It gives me an immense pleasure to present this project on Eurocurrency Market

& Its Components for the fulfillment of project work in M.Com Part I
Accountancy Semester II. This project is prepared exactly as per the guidelines
prescribed by the University of Mumbai. It presents the subject matter in a simple
and convincing language.
The project aims at understanding the topic Eurocurrency Market & Its
Components Research has demonstrated conclusively that the Eurocurrency market
has a vital role to play in every economy and it has various components.

INTRODUCTION TO INTERNATIONAL FINANCIAL MARKET

Meaning:

The International Financial Market is the place where financial wealth is traded between

individuals (and between countries).

It can be seen as a wide set of rules and institutions where assets are traded between agents in
surplus and agents in deficit and where institutions lay down the rules.
Growth of the International Financial Market

The growth of the foreign currency markets in Europe in the 2960s was one of the first
developments in the movement towards the globalization of financial markets. Prior to 1980

Eurocurrencies market was the only truly international financial market of any importance.
Eurodollar or currencies are borrowed and lent. Each currency has a demand and a supply.
The demand for foreign currency arises when tourists visits another country and need to
exchange their national currency for the currency of the country when an individual wants to

invest abroad and so on.

On the other hand, expenditures in the country, frin export earnings, from foreign investment
in the country and so on.

Link between the financial markets of each individual country & as independent markets

International financial markets serve as links between the financial markets of each
individual country and as independent markets outside the jurisdiction of any country. The

market for currencies is the heart of this international financial market.

International trade and investment are often denominated in a foreign currency. So the
purchase of the currency precedes the purchase of goods, services, or assets.

CURRENCY MARKETS
Meaning of International currency market:

International currency markets are the markets for foreign currencies where the currencies
are borrowed and lent for varying maturities. The price paid for borrowing or lending a
currency in the international currency market is the rate of interest.
Meaning of Foreign Currency Market:

The international currency markets are the adjunct of the foreign exchange markets. The

foreign exchange market is the market in which the currencies are exchanges.
In the foreign exchange market one currency is exchanged for another currency at the rate of
exchange which is the rate at which the currency of a country is exchanged against the

currency of another country.

The purpose for which currencies are exchanged in the foreign exchange market or borrowed
in the currency market may be the same, namely, for investment or for meeting debt or other
obligations. Foreign exchange market and the currency market are interrelated.

WHAT IS EUROCURRENCY?
Eurocurrency is a term used to describe deposits residing in banks that are located outside the
borders of the country that issues the currency deposit is denominated in
Example: a deposit denominated in US dollars residing in a Japanese Bank is a Eurocurrency
Deposit, or more specifically a Eurodollar deposit.
The most important implications 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

MEANING AND SCOPE OF EUROCURRENCY MARKET

Denominated in US Dollars

In a narrow sense, Euro-Dollars are financial assets and liabilities denominated in US Dollars
but traded in Europe. The US Dollar still dominates the European money market especially

London money market.

Increasing Scope of Euro-dollar Market
But the scope of the Euro-Dollar Market is increased by leaps and bonds i.e. the Euro dollar
transactions are also held in money markets beyond Europe and in currencies other than US

dollar.
Thus in a wider sense Euro-Dollar Market refers to transactions in a currency deposited
outside the country of its issue. Any currency internationally demanded and supplied and in
which the foreign bank is willing to accept liabilities and assets is eligible to become a Euro

currency.
As such dollar deposits with British Commercial Banks is called as Euro Dollar.
Similarly pound sterling deposits with French commercial bank are called as Euro-sterling.
Mark deposits in Italian banks get called as Euro-mark and so on. The market in which this

sort of borrowing and lending of currencies take place is called as Euro currency market.
Initially only dollar was used in this market. Subsequently, other leading currencies such as
British pound sterling, the German mark, The Japanese Yen and the French and the Swiss

Franc began to be used in this way.

So the term," Euro-Currency Market" is in popular use. The practice of keeping bank
deposits denominated in a currency other than that of a nation in which the deposit is held
has also spread to Non-European countries. International European monetary centre such as

Tokyo, Hongkong, Singapore and Kuwait.

Even though outside Europe and even if denominated in yen, then deposits are after referred
to as Euro-Currency because the market has been concentrated in Europe.

Components of Euro-Dollar Market:

The Euro-Dollar Market consist of the
a. Asian -dollar market,
b. Rio dollar Market,
c. Euro-Yen market,
d. Euro-sterling,
e. Euros-Swiss France,
f. Euro-French Francs,
g. Euro-Deutsche marks etc.

10

In short in these markets commercial banks accepts interest bearing deposits denominated in
a currency other than the currency of the country in which they operate and they re-lend these
funds either in the same currency or in the currency of the third country.

Meaning of Euro-dollar as per Annual report 1966, Bank for International Settlement
(BIS)

In its annual report 1966, the Bank for International Settlement (BIS) described the EuroDollar phenomenon as "the acquisition of dollars by banks located outside the United State
mostly thrones the taking of deposits, but also to some extent by swapping other currencies
into dollars and the re-lending of these dollars after re-depositing with the other banks to non

bank borrowers anywhere in the world."

The currencies involved in the Euro-Dollar market are not in any way different from the

currencies deposited with the banks in the respective home country.

But the Euro dollar is outside the orbit of monetary policy while the currency deposited with
the banks in the respective home country was covered by national monetary policy.

11

REASONS FOR THE DEVELOPMENT OF THE EUROCURRENCY

MARKET
There are several reasons for the existence and spectacular growth of the Eurocurrency market.
They are:
1. Soviets deposit of dollar in European banks:
In the 1950s Soviet Union was earning dollars from the export of gold and raw materials.
The Soviets did not want to keep them in the banks in the United States out of the fear

that the US may freeze them due to the Cold War.

The Soviets wanted dollar claims that were not subject to any control by the U.S.
government. The Soviets solved this problem by depositing their earning with dollar-

denominated deposits with banks in Britain and France.

These Soviet deposits marked the birth of the Eurocurrency market.

2. Restrictions upon sterling credit facilities:

In 1957, the Bank of England introduced restrictions on UK banks ability to lend sterling

to foreigners and foreigners ability to borrow sterling.

This induced the British banks to turn to the US dollars as an alternative means to finance
the world trade. This provided a stimulus for the growth of the Eurocurrency market.

3. Abolition of the European Payments Union and Restoration of Currency

Convertibility:
The European payments Union (EPU) enabled the European member countries to settle

trade credits among themselves with the minimum use of dollars.

In 1958, EPU was abolished and convertibility of European Currencies was restored.
Thus, European banks could hold US dollars without being forced to convert their dollar

holding with their central banks for domestic currencies.

This provided another impetus to the growth of Eurocurrency market.

4. US dollar as a key currency:

The fundamental cause for the development of Eurocurrency market was the special

position of the dollar as a key, or vehicle, currency.

The dollar continues to be the main currency that is used to carry out the international
transactions. Because of the special role of the dollar as a key currency, foreign
individuals, corporations and governments preferred to hold dollar balances.

12

5. Regulation Q and M:
In 1963, the US authorities introduced Regulation Q which fixed a ceiling on the interest
rate that US banks could pay on time deposits. Since this regulation did not apply to
offshore banks many US banks set up subsidiaries abroad to escape the banking

regulations.
Further, as the interest rates in Europe rose above the ceiling fixed by US authorities,
Eurodollar deposits became more profitable than US deposits. This was another

important cause for the rapid and sustained growth of Eurocurrency market.
Euro banks are also not required to maintain minimum cash reserve with their central
banks enabling them to lend more and earn more. In USA under regulation M such
reserves are compulsory.

6. Convenient to hold balances abroad:

International corporations often found it very convenient to hold balances abroad for

short periods in the country in which they needed to make payments.

Since the dollar is the most important international and vehicle currency in making and
receiving international payments, it is only natural a large proportion of the Eurocurrency
to be in Eurodollars.

7. Overcome Domestic Credit Restrictions:

An important reason for the growth of the Eurocurrency market is that the international
corporations can overcome domestic credit restrictions by borrowing in the Eurocurrency
market.
8. Deposit of surplus funds by OPEC Countries:
After the oil price increase of 1973, the OPEC countries began to deposit large amounts
of dollars in European banks. The Eurocurrency market experienced phenomenal growth
after 1973. The OPEC countries also did not want to keep their dollar deposits in the

United States for fear that the US government might freeze them in a political crisis.
This is exactly what happened to the (small-proportion of the) dollar deposits that Iran
and Iraq kept in the US during the US conflict with these countries in the late 1970s and

early 1980s respectively.

The Eurobanks helped to the recycle the surplus funds from OPEC countries to the deficit
oil importing countries.

13

European banks are willing to accept deposits denominated in foreign currencies and are able to
pay higher interest rates on these deposits than US banks because they can lend these deposits
higher rates. However, the spread between lending and borrowing rates on Eurocurrency deposits
is smaller than that of US banks. Thus, European banks are often able to pay higher deposit rates
and lend at lower rates than US banks. This is the result of
a) The fierce competition for deposits and loans in the Eurocurrency market,\
b) The lower operating costs in the Eurocurrrency market due to absence of leagal reserve
requirements and other restrictions on Eurocurrency deposits,
c) Economies of scale in dealing with very large deposits and loans, and
d) Risk diversification.

ORIGIN AND GROWTH

The origin of the Euro-dollar market can be traced back to 1920's when the United States

dollars were converted into local currencies for lending purposes.

However, the growth of the Euro-dollar market began to gain momentum only in late 1950's.
Since 1967 the growth of the Euro-dollar market has been very rapid. The flow of petro-

dollar s has given it an added momentum in 1970's.

As per BIS estimates its size grew from $ 2 billion in 1960 to 256.8 billion in 1969. $ 75.3
billion in 1970, $ 97.8 billion in 1971 and 131.9 billion in 1972. By 1984 the size of the
market reached $ 2,325 billion.

CREATION OF EUROCURRENCIES AND DEPOSITS

Eurocurrencies are created when someone who owns convertible currencies deposits them

with a bank outside the countries of those currencies.

The Eurocurrency market can potentially create Eurocurrencies in exactly the same way that
commercial banks create money, That is, by making loans which are redeposited in the same

banking system.
Eurobanks can generally multiple exapansion of Eurodeposites on receiving a fresh injection
of cash. In other words, deposits give rise to deposits which in turn give rise to deposits, may
be with some leakages.

14

Thus, Eurobanks can generate multiple deposit creation. This is almost like deposit creation

in the domestic monetary system.

In the case of domestic monetary system the cash reserve ratio is often statutorily fixed,

while in the case of Eurobanks, the cash reserve ratio is voluntarily decided.
The Eurocurrency markets have the potential to create credit and yet remain unregulated. The
rapid growth of the Eurocurrency markets in the 1960s and 1970s had conincided with a high

rise in the inflation rates in the industrialized countries.

According to some economists the growth of Eurocurrency markets was partly responsible
for this, since the Eurobanks have the ability to create deposits.

SAILENT FEATURES OF THE EUROCURRENCY MARKET

1. International Market:
The Euro-Dollar market is an International market. The Euro currency market emerged as
the most important channel of mobilizing funds on an International scale.
2. Free of government regulation:
The Eurocurrency market is a important channel for mobilizing funds and deploying
them on a international scale. The important centres are London, Paris, Hong Kong and

Singapore.
It is generally outside the direct control of an government regulation. More specially, they

do not face compulsory reserve requirements, interest ceilings on deposits and so on.
It is of US because they are in London, and they are also outside the control of British
government because they are in dollars.

3. Short-term nature:
The deposits and loans of Eurobanks are short-term in nature. The maturity nature of
some deposits is as short as one day and majority are under six months.

15

Interest is paid on all of them. The Eurocurrency loans are generally for short period
three months or less.

4. Close maturity of assets and liabilities:

There is a close matching of the maturity structure of assets (loans) and liabilities
(deposits). This is due to the fact that Eurobanks have to be cautious about the sudden

large withdrawals of short term funds by the depositors.

Further, the close matching of assets and liabilities reduce the risk of interest rate
fluctuations to the banks. Here the deposits are for short term and lendings are for long
term. Therefore it is necessary to maintain a balance.

5. Wholesale market:
Eurocurrency market is a wholesale market in the sense that their size of transactions is
very large. Generally, the size of individual transaction is above $1 million. It is centered
in London.
6. Eurobanks themselves the users of Eurocurrencies:
A large proportion of Eurocurrencies are used by Eurobanks themselves. Those
Eurobanks with surplus funds loan to Eurobanks having lending possibilities but are short

of funds.
The other users of Eurocurrency market facilities are non-Eurobank financial institution,
multinational corporations, international institutions like World Bank and governments.
Multinational Corporations are attracted by higher interest rates paid on their deposits and
competitive borrowing rates.

7. Well organized, efficient and large market:

Eurocurrency market is well organized and very efficient. It serves a number of roles for

multinational business operations.

It is an important and convenient device for multinational corporations to hold their

excess liquidity.
It is an important source of short term loans to finance corporate working capital needs
and foreign trade. It is a large international money market.

16

INSTRUMENTS OF THE EUROCURRENCY MARKET

Following are the instruments of Eurocurrency market:
1. Time Deposits:
A large part of money in the Eurocurrency market is held in fixed-rate time deposits.
The maturities of most of them range from one week to six months. The bulk of

Eurocurrency time deposits are interbank liabilities.

They pay a fixed, competitively determined rate of return.

2. Certificate of deposits:
Another important instrument is the Eurocurrency Certificates of deposits (CD).
A Eurocurrency CD is the negotiable receipt for a dollar deposit at a bank located outside

the US. There also exists an active secondary market for Eurodollar CDs.
This allows investors to sell Eurodollar CDs before the deposits mature. Eurodollar CDs
are issued by banks to tap the market for funds and are commonly issued in
denominations varying from $250,000 to $5 million.

3. Eurodollar floating rate CDs (FRCDs) and Eurodoller Floating rate notes (FRNs):
FRCDs and FRNs came into use as a means of protecting both borrower and lender

against interest rate risk.

By making their coupon (interest rate) payments float with market rate of interest, they
help to stabilize the principal value of the paper. FRCDs are not very active now-a-days.

4. Note Issue Facilities (NIFs):

NIFs became a significant Eurodollar instrument in the mid-1980s. It is an arrangement
between a borrower and an underwriting bank under which the borrower can issue shortterm paper known as Euronotes in its own name.

17

Under such an arrangement, the under-writing bank is committed either to purchase any

notes the borrower cannot sell or to provide standby credit.

It is something like commercial paper programmers, the only difference being that it is
with underwriting commitments.

EURO-CURRENCY INTEREST RATES:

A. Based on LIBOR
Interest rate paid to the depositors and charged for loans is based on London Interbank
Offered Rate (LIBOR). LIBOR is comparatively cheap as Euro Banks operate with a

small spread that is, the difference between deposit and lending rate.
LIBOR rates are calculated as the averages of the lending rates in the respective
currencies of leading London Banks.

B. Banks involved
At present, eight leading banks are involved in determining LIBOR rate. Since euro
deposits and lending rates are not subject to restrictions by the Central banks, euro banks
work with a smaller spread, that is, deposits are paid higher rate and loans are charged
lower rate of interest.
C. Lower spread possible:
Operating with lower spread is possible as the euro banks are not subject to various rules

and regulations which are imposed on them in their home market.

More specifically euro-currency banks are not subject to the rule of ceiling on interest on

deposits and are also not required to maintain cash reserve ratio.
Overall the banks dealing in euro currencies have more freedom and less restriction.

18

OPERATION AND EFFECTS OF EUROCURRENCY MARKET

Euro-currencies are money substitutes or near money rather than money itself as they are in

the form of demand deposits.

Euro banks do not create money, but they are essentially financial intermediaries. They bring
together lenders and borrowers. They function more like domestic saving and loan

associations rather than commercial banks in the United States.

In the east, the United States and oil exporting countries have been the main lenders of EuroDollar funds while developing countries, the Soviet Union and eastern European countries

have been the major borrowers.

The Euro-currency market performed in recycling hundreds of billions of petro-dollars from
oil exporting countries to oil importing countries during 1970's. This has paved the way for
the huge International debt problems of developing countries, particularly those of Latin
America.

ECONOMIC IMPACT OF EUROCURRENCY MARKET

The emergence and the growth of Eurocurrency market and its ability to create multiple
expansion of credit without any apparent control mechanism have given rise to certain problems
and advantages.
PROBLEMS:
The important problems associated with it are:
1. Difficulties for Central banks:
The Eurocurrency market facilities short-term speculative capital flows. This creates
difficulties for central banks in their efforts to stablise the exchange rates.
2. Less effective control:
The national monetary authorities lose effective control over monetary policy since

domestic residents can make their efforts less effective by borrowing or lending abroad.
Since Eurocurrency market contributes to increasing the degree of international mobility

of capital, it makes monetary policy less effective.

Eurocurrency market provides opportunities for avoiding many of the regulations that the
monetary authorities try to enforce on domestic money markets.

19

3. Inflationary tendencies:
Since the Eurocurrency market can be a source of international liquidity it can contribute
to inflationary tendencies in the world economy.
4. Postpone BOP adjustment measures:
The Eurocurrency market allows the central banks of deficit countries to borrow for

balance of payments purposes.

This may make these countries to postpone the needed balance of payments adjustment
measures.
ADVANTAGES:

Despite these problems arising from the growth of Eurocurrency market, it has given rise to
many advantages.
i.
ii.

It has helped to alleviate considerably the international liquidity problem.

It has provided credit to countries to finance the balance of payments deficits. In other

iii.
iv.
v.
vi.

words, it has played an important role in recycling funds from surplus to deficit countries.
It has helped to meet the short-term credit requirements of business corporations.
It has provided a market for profitable investment of funds by commercial banks.
It has enabled the exporters and importers to obtain credit.
This Eurocurrency market has helped to accelerate the economic development of some

vii.

countries like South Korea, Taiwan and Brazil.

It has been largely responsible for the increased degree of financial integration between
economies.

The Eurocurrency markets have become important sources of finance for governments and
private firms. The importance of Eurocurrency market is likely to grow with the growing
integration of the world economy and globalization. Their competitive deposit and lending rates
prove to be attractive for both investors and borrowers of funds. At the same time, the growth
Eurocurrency market has made monetary control more difficult for domestic authorities.

EUROBONDS
Meaning:

The Eurobonds are international bonds. They are the main source of borrowings in the Euromarkets. Euro-bonds are those bonds which are sold for International borrowers in several
Euro markets simultaneously by the International group of banks.

20

They are issued on behalf of multinational corporations, International agencies "and

Governments Initially the borrower was belonging to the developed countries. Later on
developing countries entered into the Euro-market on a very large scale. Euro-bonds are
unsecured securities when they are issued by Governments, corporations and local bodies

they are guaranteed by the Government of the country

Eurobonds are long-term debt securities that are sold outside the borrowers country to
raise long-term capital in a currency other than the currency of the country where the bonds

are sold.
For example, an US corporation selling bonds in London denominated in Euros or US
dollars. The incentive for term funds than available alternatively.

EUROBONDS ARE DIFFERENT FROM FOREIGN BONDS

Foreign bonds refer simply, to bonds sold in a foreign country but denominated in the
currency of the country in which the bonds are being sold. And example is an US

multinational corporation selling bonds in Britain, denominated in pounds.

On the other hands, Eurobonds are bonds sold in a foreign country and denominated in
another currency.
LEADING CENTRES IN EUROBOND MARKET:

The leading centers in the Eurobond market are London, Frankfurt, New York and Tokyo. It
is estimated that about 45 per cent of Eurobond issues were denominated in US dollars, 17
per cent in Deutsche marks, 9 per cent in pound sterling, 6 per cent in French francs, 5 per

cent in Japanese yen, 3 per cent in Swiss francs, and small percentages in other currencies.
Some Eurobonds are denominated in more than one currency in order to give the lender a
choice of the currencies in which to be repaid. This will provide some exchange rate
protection to the lender.

Eurobonds differ from most domestic bonds

Eurobonds are usually unsecured, that is, they do not require collateral, while domestic bonds

are secured.
Eurobonds are issued in Eurocurrencies by an international syndicate of banks in several
international financial markets.

21

As they are issued and traded in international financial markets, they are not subject to the
rules and regulations that apply to domestic bond markets.

Eurobonds have shorter maturities

Eurobonds have shorter maturities than the domestic bonds.

A large majority of Eurobonds are of five year maturities. Subsequently, in Eurobond markets
other short-term instruments like Euro notes and EuroMTNs (Medium term notes) were

introduced.
Euronotes are short-term to face value. They are of one, three or six months maturity. Euro
MTNs are of medium-term bearer notes. They are of small denominations with one to five
years maturity.

TYPES OF EUROBONDS
1. Straight or fixed rate bonds:
Straight or fixed rate bonds are fixed interest bearing securities, the interest normally

payable at years intervals.

Maturity from 3 to 25 years.

2. Euro Convertibile Bonds

Some euro-bonds have important equity options. Under this category the bond holder obtains

the benefit or right of converting bonds into equity.

A Euro-Convertible Bond is a quasi equity issue, that is, the bond holder acquires an option

to convert debt instrument (bond) into an equity investment.

A euro bond can be converted into a certain number of equity shares at a pr-determined price.
The annual coupon on Euro convertible bond is normally lower than other bonds. The
difference is the value of conversion procedure.

Euro convertible bonds are converted to GDRs. The conversion time depends on share price. If
share price prospect for growth remains low then no conversion may take place. Conversion is
profitable when price moves higher.
The issuing company has right of call option, that is, an issuing company can buy back the
bonds by giving a notice of its intension to buy. The investor has a put option that is the bond
holder can sell the bonds back to the issuer. Issuing companies are not allowed to exercise their

22

call option unless the closing price of the shares, for a period of 30 days, prior to the notice of
redemption is at least 140-150 per cent of the conversion which was originally agreed upon.
3. Currency option bonds
Currency option bonds are similar to straight bonds. The difference between these two
bonds is that it is issued in one currency with the option to take payment of interest and

principal in the second currency.

Normally option bonds are issued in sterling and provide option for payment in dollar or
Deutsche Mark.

4. Floating rate notes (FRN):

The floating rate notes (FRNs) were issued in 1970 and now they occupy a prime

position in the Euro-bond market.

The FRNs are similar to straight bonds in respect of maturity and denomination.
The difference is that it is payable in varying in accordance with the market conditions
unlike the fixed rate payable on a straight bond.

23

EUROEQUITY
Business firms raise finance in domestic as well as foreign markets by marketing bonds and
equities. Among foreign markets, the Euro market is one of the important financial market where
firms raise finance through Euroequities besides Eurobonds.
Meaning:

Euroequity issue refers to a process whereby a company raises funds through the sale of
equities using Global Depository Receipts (GDR) as a financial instrument, in more

than one foreign market, except in the domestic market of the issuing company.
GDRs are denominated in a currency other than the home currency of the issuing
company.

Selling of Euroequities:

Euroequities are sold through Global Depository Receipts (GDR) in international markets

specially Eurocurrency market.

GDRs are tradable securities issued by the depository bank against the domestic shares of
the issuing company (sponsor firm).

About GDR:

A GDR represents one or more shares of a sponsored or issuing company. The issuing

company deposits the share with the depository bank.

With the help of brokers, the depository banks sell the shares through depository receipts.
The investor does not get the possession of shares but only the depository receipts. GDRs
holders have no voting rights unless GDRs are converted to shares.

Raising funds through euro equity involves the following:

1. Sponsor or issuing company:
It is the company which desires to raise capital through euro-equities. It works out the

objectives and programme of raising funds.

It appoints depository banks and provides all the information to the investment bankers.

2. Depository bank:

24

It prepares and issues GDRs. It also appoints a local custodian. It is responsible for
issuing and cancelling of GDRs.

3. Investment bankers:
They form the syndicate of participating banks. Work out underwriting process. Help in
completing all the technical requirements.
4. Custodian:
It holds the underlying ordinary shares of GDRs. It works as a local agent for depository

banks.
Besides, the above, other parties involved are brokers, lawyers and accountants who help
in the process of marketing GDRs.

Important stock exchanges which deal with GDRs

a)
b)
c)
d)

London Stock Exchange

Luxembourg Stock Exchange
Dubai International Finance Exchange and
Hong Kong Stock Exchange

Indian companies which are listed and have a consistent track record of past three years can
market euro equity through GDRs. This requirement was relaxed for raising funds for
infrastructure projects.
From May, 1992 onwards, Indian companies have been issuing GDRs, Foreign Currency
Convertible bonds, Euro Currency bonds in the Euro market on a large scale. Indian government
relaxed rules about remitting funds into India and its use for approved uses. The restriction on the
number of issues that a company could float during a financial year was also relaxed.

25

EURO CREDITS
Euro credit or euro loans are the loans extended for one year or longer. The market that deals in
such loans is called Euro Credit Market.
Maturity:

The common maturity for euro credit loans is 5 years. Since euro banks accept short-term

deposits and provide long-term loans, it is likely that asset liability mismatch may arise.
To avoid the Euro banks often extend floating rate euro credit loans fixed to some market

interest rate.
The London Inter Bank Offer Rate (LIBOR) is the most commonly used interest rate. It is
the rate changed for loans between Euro Banks.

Participants in Euro Credit Market:

The major lending banks in the Euro credit market are Euro banks, American, Japanese,
British, Swiss, French, German and Asian (specially that of Singapore) banks, Chemical
Bank, JP Morgan, Citicorp, Bankers Trust, Chase Manhattan Bank, First National Bank

of Chigaco, Barclays Bank, National Westminster, BNP, etc.

Among the borrowers, there are banks, multinational groups, public utilities, government
agencies, local authorities, etc.

Dealing in Euro Credits:

When a borrower approaches a bank for Euro Credit, a formal document is prepared on
behalf of potential borrowers. This document contains the principal terms and conditions of

loan, objectives of loan and details of the borrower.

Before launching syndication, the approached bank decides primarily, in consultation with
the borrower, a strategy to be adopted, i.e. whether to approach a large market or a restricted
number of banks to form the syndicate. Each of the banks in syndicate lends a part of the

loan. The duration of this operation is normally about 6 to 8 weeks.

Several clauses may be introduced in the contract of Euro-debt:
A. Pari-Passu Clause that prevents the borrower from contracting new debts that
subordinate the interest of lenders;
B. Exchange Option Clause that allows the withdrawal of a part or totality of loan in
another currency;

26

C. Negative Guarantee Clause that commits the borrower not to contract other debts that
subordinate the interest of lenders.

CHARACTERISTICS OF EURO CREDIT

A major part (more tham 80%) of the Euro debts is made in US dollars. The second (but far

behind) is Pound Sterling followed by Deutsch mark, Japanese yen, Swiss, france and others.
Most of the syndicated debts are of the order of $50 million. As far as the upper limits are
concerned, amounts involved are of as high magnitude as $5 billion and more. In 1990, Euro

tunnel borrowed $6.8 billion.

On an average, maturity periods are of about five years (in some cases it is about 20 years).

The reimbursement of the loan may take place in one go (bullet) or in several installments.
The interest rate on Euro debt is calculated with respect to a rate of reference, increased by a
margin (or spread). The rates are available and generally renewable (roll over credit) every

six months, fixed with reference to LIBOR.

The LIBOR is the rate of money market applicable to short-term credit among the banks of
London. The reference rate can equally be LIBOR at Paris and LIBOR at Frankfurt, etc. It is

revised regularly.
The margin depends on the supply and demand of the capital as also on the degree of the risk

of these credits and the rating of borrowers.

Financial institutions are in vigorous competition. There is an active secondary market
of Euro debts. Numerous techniques allow banks to sell their titles in this market.

27

DISTINCTION BETWEEN EURO CREDITS AND EURO BONDS

Both Euro bonds and Euro credit (Euro currency) financing have their advantages and
disadvantages. For a given company, under specific circumstances, one method of financing may
be preferred to other. The major differences are:
1. Cost of Borrowings:
Euro bonds are issued in both fixed rate and floating rate forms. Fixed rate bonds are an
attractive exposure management tools since the known long-term currency inflows can be

offset by the known long-term outflows in the same currency.

In contrast, Euro currency loans carry variable rates.

2. Maturity:
Euro bonds have longer maturities while the period of borrowing in the Euro currency
market has tended to lengthen over time.
3. Size of the issue:
Earlier, the funds available for lending at any time have been much more in the inter-bank

market than in the bond market, but of late, this situation does not hold true.
Moreover, although in the past the floatation costs of a Euro currency loan have been
much lower than a Euro bond (about 0.5% of the total loan amount verses about 2.25% of
the face value of the Euro bond issue), compensation has work to lower Euro bond
floatation costs.

4. Flexibility:
In a Euro bond issue, the funds must be drawn in one sum on a fixed date and repaid

according to a fixed schedule, unless the borrower pays a substantial prepayment penalty.
By contrast, the drawdown in a floating rate loan can be staggered to suit the borrowers

need and can be repaid in whole or in part at any time, often without penalty.
Moreover, a Euro currency loan with a multi-currency clause enables the borrower to
switch currencies on any roll-over date, whereas switching the denomination of a Euro
bond from currency A to Currency B would require a costly, combined, refunding and

reissuing operation.
5. Speed:

Funds can be raised by known borrower very quickly in the euro currency market. Often,
a period of two to three weeks should suffice.

28

A euro bond financing generally takes more time, though the difference is becoming less
significant.

CURRENT SCENARIO OF EUROCURRENCY MARKET

The troika of the European Commission (EC), European Central Bank (ECB), and International
Monetary Fund (IMF) has proved unable to restore the prospect of recovery in Greece and any
new lending program would run into the same difficulties. Particularly as the Greek failure
mostly demonstrates how wrong a single currency is for Europe. The Greek backlash reflects the
enormous pain and difficulty that comes with trying to arrange internal devaluations (a
euphemism for big wage and spending cuts) in order to restore competitiveness and repay an
excessive debt level.
1. Unemployment due to recession:
Faced with five years of recession, more than 20 percent unemployment, further cuts to come
and a stream of failed promises from politicians inside and outside the country, a political

backlash seems only natural.

With IMF leaders, EC officials and financial journalists floating the idea of a Greek exit

from the euro, Greeces economy can only get worse.

Greeces exit is simply another step in a chain of events that leads towards a chaotic
dissolution of the euro zone.

2. ECB denied
The ECB has always vehemently denied that it has taken an excessive amount of risk despite

its increasingly relaxed lending policies.

But between Target and direct bond purchases alone, the euro system claims on troubled
periphery countries are now approximately 1.1 trillion Euros. This amounts to over 200

percent of the capital of the euro system.

No responsible bank would claim these sums are minor risks to its capital or to taxpayers.
These claims also amount to 43 percent of German Gross Domestic Product, which is now

around 2.57 trillion Euros.

With Greece proving that all this financing is deeply risky, the euro system will appear far
more fragile and dangerous to taxpayers and investors.

29

The calamity of a Greek default is likely to result in a flight from banks and sovereign debt
across the periphery, and that to avoid a greater calamity all remaining member nations need to
be provided with unlimited funding for at least 18 months. The ECB is not prepared to provide
such a firewall, and no other entity has the capacity, legitimacy, or will to do so.

30

CONCLUSION

The creation and growth of the Eurocurrency market has been an important side effect of the
increase of international economic activity over the past few decades. The market has
expanded largely as a means of avoiding the regulatory costs involved in dollar-denominated

financial.
Due to the size and importance of the foreign exchange market, it remains largely
unregulated. There is no international organization to look over it or any institutions that sets
rules. The name Eurocurrency market is given to any bank deposits in any country held in a

different countrys currency.

An example of this is United States dollar depositing in a British bank. These banks are
called Euro banks. The emergence of euro banks has facilitated trade and investment between

countries.
A Eurocurrency is any currency that is deposited outside of the home country. Since
approximately two thirds of Eurocurrency is U.S. dollars, central banks and regulators are

concerned about Eurocurrency because they are stateless money.

Eurocurrency market has very little regulation, such as taxes, restrictions on capital
movements and exchange controls. Thus, the market attracts more investors. It is easier for
banks around the world to use the Eurocurrency market to move and store funds more

profitably than they could in many countries.

Since the market is relatively free of regulation, Eurodollar market must operate on narrower
margins than banks in the United States. The Eurocurrency market gives investors the
opportunity to hold short-term claims on commercial banks, which also act as intermediaries

to transform these deposits into long-term claims on final borrowers.

Not only does Eurocurrency market allow for more convenient borrowing, it also improves

the international flow of capital for trade between countries and companies.
This market also attracts domestic deposits because it offers a higher interest rate. The largest

Eurocurrency markets are located in London, New York, and Tokyo.

This report discussed various issues related to the Eurocurrency market. Specifically, it
explained development as well as the features of the Eurocurrency market.

BIBILIOGRAPHY
1. BOOK

31

Economics of Global Trade and Finance

2. WEB
https://www.scribd.com/doc/57281443/MBA-4-Set-1-MF0015-International-FinancialManagement
https://www.scribd.com/doc/213864290/eurocurrency-market
http://www.bms.co.in/list-out-the-growth-and-functions-of-eurocurrency-markets/
http://www.europarl.europa.eu/workingpapers/econ/101/default_en.htm
http://www.authorstream.com/Presentation/aSGuest89910-889888-euro-currency-market/
https://en.wikipedia.org/wiki/Euro
http://www.investorwords.com/7856/Eurocurrency_market.html
http://www.bankpedia.org/index.php/en/106-english/i/23258-international-financialmarket-encyclopedia
http://www.journals.elsevier.com/journal-of-international-financial-markets-institutionsand-money/