INTERNATIONAL FINANCE

KANTIPUR VALLEY COLLEGE

PURBANCHAL UNIVERSITY

LECTURER: UTSHAUV RAI

 UNIT 7:
INSTITUTIONAL
STRUCTURE OF
INTERNATIONAL
TRADE AND FINANCE
 EURODOLLARS
The term eurodollar refers to U.S. dollar-denominated deposits at
foreign banks or at the overseas branches of American banks.
Because they are held outside the United States, eurodollars are not
subject to regulation by the Federal Reserve Board, including reserve
requirements. Dollar-denominated deposits not subject to U.S. banking
regulations were originally held almost exclusively in Europe (hence,
the name eurodollar).
Now, they are also widely held in branches located in the Bahamas and
the Cayman Islands.
The term was originally coined for U.S. dollars in European banks, but
it expanded over the years to its present definition. A U.S. dollar-
denominated deposit in Tokyo or Beijing would be likewise deemed a
Eurodollar deposit (sometimes an Asiadollar). There is no connection
with the euro currency or the Eurozone.
OFFSHORE CURRENCY MARKET
The term offshore refers to a location outside of one's home country.
The term is commonly used in the banking and financial sectors to
describe areas where regulations are different from the home country.
Offshore locations are generally island nations, where entities set up
corporations, investments, and deposits. Companies and individuals
(typically those with a high net worth) may move offshore for more
favorable conditions, including tax avoidance, relaxed regulations, or
asset protection. Although offshore institutions can also be used for
illicit purposes, they aren't considered illegal.
When currencies are sold within the local market, it is called an
onshore market. But when foreign currencies are exchanged in the
overseas market, it’s called offshore market. It is much more
complicated and also, difficult to monitor, which is why regulators
are wary of the offshore foreign exchange market.
 EURODOLLARS
Gradually, after World War II, the quantity of U.S. dollars outside the
United States increased significantly, as a result of both the Marshall
Plan and imports into the U.S., which had become the largest consumer
market after World War II.
As a result, large amounts of U.S. dollars were in the custody of foreign
banks outside the United States. Some foreign countries, including the
Soviet Union, also had deposits in U.S. dollars in American banks,
granted by certificates. Various accounts are given of the creation or
booking of the first Eurodollar, but most trace back to Communist
governments keeping dollar deposits abroad.
In one version, the first booking traces back to Communist China, which,
in 1949, managed to move almost all of its U.S. dollars to the Soviet-
owned Banque Commerciale pour l'Europe du Nord in Paris before the
United States froze the remaining assets during the Korean War
 EURODOLLARS
In another version, the first booking traces back to the Soviet Union during
the Cold War period, especially after the invasion of Hungary in 1956, as the
Soviet Union feared that its deposits in North American banks would be
frozen as a retaliation.
It decided to move some of its holdings to the Moscow Narodny Bank, a
Soviet-owned bank with a British charter. The British bank would then
deposit that money in the U.S. banks.
There would be no chance of confiscating that money, because it belonged to
the British bank and not directly to the Soviets.
On 28 February 1957, the sum of $800,000 was transferred, creating the first
Eurodollars. Initially dubbed "Eurobank dollars" after the bank's telex
address, they eventually became known as "eurodollars" as such deposits
were at first held mostly by European banks and financial institutions.
A major role was played by City of London banks, such as Midland Bank,
now HSBC, and their offshore holding companies.
 EURODOLLARS
In the mid-1950s, Eurodollar trading and its development into a dominant
world currency began when the Soviet Union wanted better interest rates on
their Eurodollars and convinced an Italian banking cartel to give them more
interest than could have been earned if the dollars were deposited in the U.S.
The Italian bankers then had to find customers ready to borrow the Soviet
dollars and pay above the U.S. legal interest-rate caps for their use, and were
able to do so; thus, Eurodollars began to be used increasingly in global
finance.
Eurodollars can have a higher interest rate attached to them because they are
out of reach from the Federal Reserve. U.S. banks hold an account at the Fed
and can, in theory, receive unlimited liquidity from the Fed if necessary.
These required reserves and Fed backing make U.S. dollar deposits in U.S.
banks inherently less risky, and Eurodollar deposits slightly more risky, which
requires a slightly higher interest rate.
 EURODOLLARS
By the end of 1970, 385 billion Eurodollars were booked offshore.
 These deposits were lent on as U.S. dollar loans to businesses in other
countries where interest rates on loans were perhaps much higher in the
local currency, and where the businesses were exporting to the US and
being paid in dollars, thereby avoiding foreign exchange risk on their
loans.
Several factors led Eurodollars to overtake certificates of deposit (CDs)
issued by U.S. banks as the primary private short-term money market
instruments by the 1980s, including:
1. The successive commercial deficits of the United States
2. The U.S. Federal Reserve's ceiling on domestic deposits during the
high inflation of the 1970s
3. Eurodollar deposits were a cheaper source of funds because they were
free of reserve requirements and deposit insurance assessments [
 EURODOLLARS
A certificate of deposit (CD) is a savings account that holds a fixed
amount of money for a fixed period of time, such as six months, one
year, or five years, and in exchange, the issuing bank pays interest.
When you cash in or redeem your CD, you receive the money you
originally invested plus any interest. Certificates of deposit are
considered to be one of the safest savings options.
Since the Eurodollar market is not run by any government agency its
growth is hard to estimate. However, the Eurodollar market is by a wide
margin the largest source of global finance. In 1997, nearly 90% of all
international loans were made this way.
In December 1985 the Eurodollar market was estimated by J.P. Morgan
Guaranty bank to have a net size of 1.668 trillion.
In 2016, the Eurodollar market size was estimated at around 13.833
trillion.
 DETERMINATION OF OFFSHORE CURRENCY
INTEREST RATES
The interest rates charged to borrowers of Eurocurrencies are based
on London Interbank Offer Rates (LIBOR) in the particulars
currencies.
LIBOR rates are those offered in interbank transactions and are base
rates for non-bank customers.
LIBOR rates are calculated as the averages of the lending rates in
the rescpective currencies of leading London banks.
Non-bank borrowers are charged on a “LIBOR-plus” basis, with the
interst premium based on the creditworthiness of the borrower.
For example, a corporation might be offered a loan at a LIBOR plus
2 percent.
With borrowing maturities of over six months, a floating interest
rate is generally charged.
DETERMINATION OF OFFSHORE CURRENCY
INTEREST RATES

LIBOR, other interest rate indexes Updated: 07/27/2021

This week Month ago Year ago
Bond Buyer's 20 b
ond index 2.03 2.16 2.10

FNMA 30 yr Mtg
Com del 60 days 2.34 2.47 1.97

1 Month LIBOR R
ate 0.09 0.10 0.17

3 Month LIBOR R
ate 0.13 0.14 0.27

6 Month LIBOR R
ate 0.16 0.16 0.32

Call Money 2.00 2.00 2.00

1 Year LIBOR Rat
e 0.24 0.25 0.46