Eurodollar

10 Key excerpts on "Eurodollar"

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  eBook - ePub

  The Strategic Analysis of Financial Markets

  (In 2 Volumes)Volume 1: FrameworkVolume 2: Trading System Analytics

  • Steven D Moffitt(Author)
  • 2017(Publication Date)
  • WSPC

    (Publisher)

  Since Eurodollar futures are used in our yield curve analysis, we present briefly some practical information about that market. An Eurodollar is a dollar time deposit held in a foreign bank. Because U.S. Dollars are the default currency in international transactions (e.g. crude oil is priced in dollars) and therefore are in demand in foreign markets, time deposits of Eurodollars generally have yields higher than U.S. Treasuries of comparable maturities. This is not the only reason for higher yields, but a discussion of others is beyond the scope of this chapter.

  The Eurodollar market is an interbank market and is not organized as an exchange, since its instruments are Eurodollar time deposits at banks. However, a standardized set of maturities is offered by market-making banks — overnight, 1 week, 1 month, 2 months, 3 months and so on up to 10 years or more. Customized maturities can also be negotiated with a dealing bank. Each bank that participates in the Eurodollar market posts its own bids and offers, but bank markets are seldom significantly out of line with others for extended periods, since that invites arbitrage and basically, “gives away money.”

  Eurodollars time deposits are quoted using annualized simple interest assuming a 30/360 day count. This means that a 3-month (3*30 = 90) day 1,000,000 Eurodollar time deposit made at 4% will pay to its holder at the end of 90 days.

  14.2.2Eurodollar Futures

  14.2.2.1Eurodollar Contract Structure

  In 1981, the Chicago Mercantile Exchange (CME) introduced a series of futures contracts on 3-month Eurodollars. On the first trading day, December 9, 1981, only 3 contracts were offered, but by 1992, there were 40 contracts with expirations in March, June, September and December of the next 10 years. In general, the last trading day for quarterly contracts is the Friday preceding the third Wednesday of the contract month in March, June, September and December.1 There are also serial

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  eBook - ePub

  Money and Capital

  A Critique of Monetary Thought, the Dollar and Post-Capitalism

  • Laurent Baronian(Author)
  • 2022(Publication Date)
  • Routledge

    (Publisher)

  Burn, 2006 : 4).

  Eurodollars are, literally, nothing more than dollar-denominated time deposits that are not subject to the US banking regulation because they are issued by a non-US commercial bank or a non-US branch of a commercial bank. The expansion of these deposits occurs when a Eurobank re-deposits Eurodollar funds that have been deposited with it. Each re-deposit creates a deposit liability on the Eurobank’s balance sheet; the total Eurodollars created can therefore be several times the original claim on the Eurobank (Greenberg, 1983 : 1495). These are time deposits (or certificates of deposit, see below) which cannot be used as a means of exchange to settle debts. On the one hand, and unlike bank deposits, there is no ex nihilo issuance of dollars on this market since here credit in Eurodollars is conditional on an initial deposit in a New York bank. Moreover, it is not possible to draw cheques on these deposits, for example, and thus to bring these deposits into commercial circulation other than by converting them into cash. But on the other hand, these deposits, whose maturity varies between one day and five years but mostly between one week and six months (Murau, 2018 : 18), are permanently replicated: “Once money is raised, then without a reserve requirement it can be loaned, deposited, re-loaned, re-deposited, re-loaned, and so on in offshore markets without limits imposed by the banking system” (Allen, 2016 : 4). This is what inspired Friedman to say that Eurodollars only come from the bookkeeper’s pen.6

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  The International Monetary System

  Highlights From Fifty Years Of Princeton's Essays In International Finance

  • Peter B Kenen(Author)
  • 2019(Publication Date)
  • Taylor & Francis

    (Publisher)

  5 The Euro-Dollar Market: An Interpretation Akxander K. Swoboda I. INTRODUCTION This essay sketches a possible and hopefully plausible interpretation of the development of the Euro-dollar market within the broader con-text of the international monetary system. It does not contribute any new statistical or institutional material to the growing body of literature deal-ing with this most fashionable of international financial topics, but attempts to focus attention on some of the features of the Euro-dollar market most relevant to economic theory and policy. The Euro-Dollar Market Though most readers will be familiar with the operation of the Euro-· dollar market, a very brief survey of some of its features may serve as a useful introduction to the issues raised in this paper. The Euro-dollar market is part of the Euro-currency market. At least three features characterize Euro-currency operations: institutions operat-ing in the market acquire claims and issue liabilities in a currency other than that of their country of residence; these assets and liabilities are usually short-term in nature; and all transactions involve the inter-mediation of banks. The main currencies which banks operating in the market accept (borrow) and place (lend) are the United States dollar, the British pound sterling, the Swiss franc, the German mark, the Dutch guilder, the French franc, and the Italian lire. The market area extends farther than the Euro-currency label implies, though the main centers--such as London, Z'Urich, or Frankfurt-are located in Europe. The Euro-dollar instrument is a foreign-currency deposit at a hank. Rates on call, seven-day, one-, three-, and six-month deposits are usually quoted. For our purposes, it will be sufficient to define a Euro-dollar deposit as any dollar deposit at a non-American bank. The source of this deposit can be (I) a claim previously held on the United States, ( 2) an asset denominated in a foreign currency, or (3) a.

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  The Re-Emergence of Global Finance

  • G. Burn(Author)
  • 2006(Publication Date)
  • Palgrave Macmillan

    (Publisher)

  Yet, while Eurodollars are ready and willing to flow into whatever country offers their owners the best deal, they can just as well remain offshore in a parallel international money market, where the absence of reserve requirements allows banks to operate on narrower margins and hence offer more competitive rates to both borrowers and lenders. Then again, it should not be forgotten that in the early 1960s central banks were themselves probably the largest operators in the Eurodollar market, as those countries running balance of payments surpluses used it to mop up their excess dollars so as to maintain their currency parities within the Bretton Woods System and to control domestic money supply. America and the Euromarkets 155 While the Kennedy Administration had implemented more than 30 different measures to improve the dollar position, as 1962 progressed it became clear that the deficit problem was intensifying and becoming more intractable. The US Treasury became increasingly concerned that if their policy of ‘ad-hocery’ was seen not to be working, they would be forced to agree to the use of more drastic measures; principally, either/or both, the raising of interest rates or/and the application of capital controls, neither of which the Kennedy Administration wished to see imposed. It is in the context of this intractable balance of payments prob- lem that we see the US Treasury taking an ever intensifying interest in the operation of the Eurodollar market. For example, meetings in Washington in April, between senior representatives of the US and UK monetary authorities bring up the subject for the first time, and demonstrate US doubts and concerns. Then, in July, a report on short-term capital outflow from the US wondered where exactly the outflow had gone.

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  The Law and Practice of Offshore Banking and Finance

  • Edmund Kwaw(Author)
  • 1996(Publication Date)
  • Praeger

    (Publisher)

  . provided that such funds are used only to support the operations outside the United States of the depositor or of its affiliates located outside the United States. 35. Lichtenstein, "The Regulatory Structure," p. 485, see note 30; Stigum, The Money Markets, p. 199, see note 7, taking into consideration the creation of IBFs, defines the Eurodollar as "simply dollars held on deposit in a bank or bank branch located outside the United States or in an IBF." This page intentionally left blank

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  The Political Economy of U.S. Monetary Policy

  How the Federal Reserve Gained Control and Uses It

  • Edwin Dickens(Author)
  • 2016(Publication Date)
  • Routledge

    (Publisher)

  banks did not concede defeat and give up their international financial business. Instead, they started bidding for dollar deposits to lend to their clients in the former colonies. Even though there is no data available prior to 1964, the data presented in Table 6.1 suggest that between 48.6 percent and 68.6 percent of the net size of the Eurodollar market can be accounted for by U.K. banks replacing an international financial business based on sterling with one based on dollars. 3 Two factors explain the ability of U.K. banks to substitute dollars for sterling in their international financial operations. First, with cumulative U.S. balance-of-payments deficits of $33.8 billion by the end of 1965, there were plenty of dollars sloshing around for U.K. banks to bid for. Second, with a bank cartel in the U.S. maintaining a monopoly price for dollar loans in the early 1960s, there was ample opportunity for U.K. banks to build a profitable dollar-based business and still entice clients with loans priced below the monopoly price. To speak more precisely, the monopoly price for dollar loans in the early 1960s was a 4.5 percent lending rate (i.e. the U. S. prime rate) plus a requirement that borrowers maintain compensating balances of 10 percent to 20 percent of loans. The cost of borrowing dollars from the U. S. bank cartel thus ranged from 0.045/1 − 0.1 to 0.045/1 − 0.2, or from 5 percent and 5.6 percent. During the same period, the interest rate on Eurodollar deposits averaged 4.1 percent. Therefore, U.K. banks had ample room to bid for Eurodollar deposits then lend them at profitable margins while still underpricing loans offered by the U.S. bank cartel. As a reflection of this fact, by the end of 1965 U.K. banks had attracted $5.3 billion of Eurodollar deposits, an amount equal to 15.7 percent of the $33.8 billion sloshing around in the world economy as a result of U. S. balance-of-payments deficits. 4 Table 6.1 Net size of the Eurodollar market and the U.K

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  eBook - ePub

  International Money

  A Collection of Essays

  • Charles P. Kindlerberger(Author)
  • 2013(Publication Date)
  • Taylor & Francis

    (Publisher)

  The sharp contraction of the Eurobond market was accompanied by sizeable expansion in Eurocurrency long-term loans with interest rates adjusted each six months to the London Inter Bank Offer Rate (LIBOR) – another classic example of quantity coming to dominate price. Governmental and parastatal units in especially France, Britain and Italy borrowed billions of dollars in this way from Eurocurrency banks at rates up to fifteen years until in the Summer of 1974, following the failures of the Franklin National and Herstatt Banks from speculation in foreign exchange, the Eurocurrency banks began to hold back from such loans. Eurobanks started off blithely enough, lending long for fifteen years against liabilities of typically five days, in the belief that any withdrawal of dollars by depositors would be controlled by recycling. In the Summer of 1974, concern was less for the nervousness of depositors than for the credit worthiness of borrowers. Eurodollar depositors were locked in so long as any central bank which purchased the dollars to make its local currency available to parties withdrawing from the Eurodollar market would in turn redeposit the dollars in Eurocurrency centers. Fear of default by some large borrower, which was first felt in the Summer of 1974, created a new and much more dangerous risk.

  Outside the Eurocurrency market, floating does not appear to have discouraged international investment. Portfolio movements both in and out of the USA rose prior to the decline in stock-exchange averages in the Summer of 1974. United States direct investment outward declined slightly in 1972 from the high level of 1971 and much more sharply in 1973, to levels of 1967, which were, however, still substantial. Foreign investment in the USA, on the other hand, rose considerably, suggesting the possibility, currently under investigation, that direct investment is responsive to over- and undervaluation of exchange rates.

  In short-term markets, however, capital movements neither dried up nor turned tamely stabilizing. Leads and lags operated against the dollar as multinational corporations, many of which protested that they never sold dollars, at least postponed buying them with foreign profits. Inside the USA the demand for loans was substantial and some considerable part of it appears to have been for selling dollars short. How much of the short-term capital outflow in 1972 and 1973 was speculative, leaning on the dollar to drive it still further down, and how much was a continued response to differential interest rates lower in the USA than in Europe cannot readily be determined. Exchange speculation seems, however, to have spread widely.

  The initial view of the banks was that they enjoyed flexible exchange rates. They widened margins, and increased turnover. Walter Wriston’s statement, noted above, that the system was good for banks, and that if industrial companies regarded it as a headache, it was the number three headache, not the number one, was made before the failure from excessive speculation of the Franklin National Bank and the Herstatt. Banks have learned that their foreign-exchange departments can run exchange risks during the day, within which foreign currencies may fluctuate by as much as 3 or 4 per cent, even when they close out net positions at the end of the day. And all banks have become more alert to the credit worthiness of the names whose paper they buy. In the early stages, foreign-exchange departments spent time calculating spreads and gave little thought to credit worthiness, an issue handled in another department of the bank. The troubles of the Spring of 1974 changed this.

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  Dilemmas of the Dollar

  Economics and Politics of United States International Monetary Policy

  • C. Fred Bergsten(Author)
  • 2017(Publication Date)
  • Routledge

    (Publisher)

  The key currency roles of the dollar—including the restrictions on U.S. capital exports to defend those roles—un-doubtedly contributed to the inducement to U.S. banks to invest abroad, to maximize the potential earnings available to them through financing third-country trade and Eurodollar transactions. The roles must therefore be charged with perhaps one-half the short-term balance-of-payments costs of the net annual outflow, perhaps $150 million in 1972. 36 Finally, it will be recalled that a key currency country can most directly maintain foreign confidence in its fixed-price convertibility by extending exchange-value guarantees on foreign holdings of its currency. The dollar's roles thus levy on the United States the contingent costs of restoring the value of foreign holdings in the event of a dollar devaluation to the extent that it guarantees the value of such holdings in terms of SDRs, gold, or another currency, 37 The United States has heretofore extended such guarantees only on swap drawings and Roosa bonds. As a result of the 1971 devaluation, it incurred a liability estimated at $172 million on these debts—implying that about $2 billion, or 3 per cent of foreign dollar holdings (4 per cent of official holdings) carried guarantees. 38 Conclusion The several direct economic effects of the international roles of the dollar on the U.S. balance of payments are summarized in the following tabulation. For purposes of demonstrating the evolution over time, it compares the effects which policy-makers could anticipate in 1973 with those which could have been anticipated at the end of i960 and at the end of 1968. The three-month Treasury bill rate in each year 38 is used to estimate interest payments, and it is assumed that lending rates by U.S. banks in each case averaged one percentage point higher. Several conclusions derive from this analysis

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  United States of Europe

  European Union and the Euro Revolution

  • Manoranjan Dutta, Badi H. Baltagi, Efraim Sadka(Authors)
  • 2011(Publication Date)
  • Emerald Group Publishing Limited

    (Publisher)

  The EU is an integrated continental economic unit with competitive shares of world output and trade. The euro has become a competitive currency and it will become stronger when the 10 new members meet convergence criteria to join and the three out-members can no longer resist its lure. Even limiting our discussion to the EU-12 of the Eurozone, it is clear that the euro and the dollar have become two highly competitive currencies. Given the thesis that a currency’s competitive strength depends on the volume of goods and services its economy produces and its share of world trade, let us define the optimality of a currency by its competitive shares of world output and trade, and not by its geographical area or the size of its population (see also Dutta, 2004; Hesse, 1993 ; Issing, 1996 , 1999a, 1999b, 2001 , 2002a, 2002b, 2002c, 2011; Letiche, 1993, 2000 ; Obstfeld, 1999 ; Temperton, 1998 ; Vanthoor, 2002 ; Welsh, 1999 ). Let us turn to the subject of euro–dollar exchange rate fluctuations. Table 5.12a presents the share of official foreign exchange holdings for The Euro and the European Central Bank (ECB) 111 selected years since the introduction of the euro in 1999 as an international currency. For all countries, the US dollar and the Japanese yen have lost some ground, but the British pound sterling improved its share of official world currency reserves. For developing countries, we see a parallel movement in reserve holdings, but for industrialized countries, all three currencies have lost some market shares. The key point, however, is that for all categories the euro has been steadily gaining ground. For all countries, the dollar’s share of international foreign exchange holdings have declined from the high of 71.0 percent in 1999 to 65.8 percent in 2003. For the euro, its share has moved up from the low of 17.9 percent in 1999 to a high of 25.3 percent in 2003.

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  Macroeconomics, Agriculture, And Exchange Rates

  • Philip L Paarlberg(Author)
  • 2019(Publication Date)
  • CRC Press

    (Publisher)

  By 1985, when the dollar had appreciated much further, the Eurodollar rate was only 30 basis points above the domestic U.S. interbank interest rate, in the same range as the differentials for the pound, mark, yen, Canadian dollar, and Swiss franc. Chart 1 shows a comparison of the London Interbank Offer Rate (LIBOR) with a domestic U.S. CD rate, adjusted for reserve requirements. The differential, which was clearly positive in the early 1980s, peaked during the Mexican debt crisis in August 1982 and declined steadily afterward, reaching zero in early 1985, about the time when the dollar's value peaked. The evidence thus suggests that the United States was perceived as increasingly risky after 1982. The story based on safe-haven fundamentals does not explain the continued appreciation of the dollar from 1982 to February 1985 any better than the story based on real interest fundamentals. The field would appear to be open to bubble theories. The possibility of speculative bubbles leads to the second explanation, besides the risk premium, that is often given for the econometric findings of biasedness in the forward exchange market: the peso problem. The standard tests presume that the error term, the difference between expected depreciation and the ex post realization, is distributed normally and independently over time. But if there is a small probability of a big decline in the value of the Table 2.2a Deviations from Interest Parity Within Jurisdictions (Three-month interest rates in percentage per annum) Euro $ -fd Euro i. Euro I. Euro $ -fd Euro DH Euro U.K. interbank U.K. T-bill Euro DH Ge.

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