Euro Markets

Question 1

IMM

Answer 1

Between countries
Euro currency markets: banking markets outside legal regulation of any one country for transactions
- centres: London Pairs
-offshore banking : HK, Singapore

Eurobanks: generally free of gov regulation (i.e. compulsory reserve, interest ceilings)

Question 2

what are Eurobanks? market? business

Answer 2

-are FIs that accept deposits and make loans in foreign currencies
-free from regulatory control
-benefit from eco of scale
-avoid much of personnel expense (administration cost)
-highly competitive
-don’t have to pay deposit insurance
-lending almost exclusive to high quality customers
-high transaction costs

Question 3

How do Eurobanks work?

Answer 3

dont create aby currency, but transfers surplus funds from one org to another with borrowing requirements

Question 4

syndicate loan and how is its rate also caculated?

Answer 4

group of banks into single borrower
-floating rate of interest based on spread over LIBOR with rate adjusted every 6- 12 months to reflect changes in LIBOR
-Usually 3- 8 years maturity

+for banks: opportunities and diversify risk
+for borrower: obtain large sums of money (normally at lower cost)

Question 5

Euronotes are a ST borrowing market with 3 types of issuance, what are they?

Answer 5

-Note-issuing facilities (NIFs): original Euro-notes underwritten by a group of banks with mt

• Eurocommercial paper: st borrowing, <9 months, not underwritten by group of banks
• Euro mt notes (EMTNs): >9 months, <10 years. becoming more popular over traditional bond

Question 6

what are Euro Bonds?

Answer 6

bond sold by a domestic or foreign entity in a currency different from the country the bond is issued in
-typically 3-25 years (80% are under 10 years), by a group of banks underwriting the issue, sold bonds to investors and ran secondary markets
-yield depends on market conditions and credit rating issue of issuer

Question 7

types of Eurobonds

Answer 7

• can be convertible
  -can be a warrant (mt- LT option attached to a bond that gives the holder a right to buy or sell the security at a given price
  @longer maturites than most options
  @issuer has possbility of capital gain= raise finance cheaper
  -coupon stripping
  -callable/puttable:
  @callabe: issuer can redeem bond at a stated earlier date
  @puttable: investor can sell bond at a stated earlier date
  -dual currency
  -global bonds: sold in Eurobond market and US at same time
  -Asset-backed

Question 8

participants of Eurobond: borrower

Answer 8

goverment
quasi-goverment (EU)
international financial org
banks
large corps

Question 9

participants of Eurobond: lender

Answer 9

retail investors
-well off private individuals
-banks
investment institutions

Question 10

Explain what is meant by a Eurodollar.

Answer 10

defined as banking markets that are conducted outside legal jurisdiction of the currency authorities that is used.
e.g. eurodollar deposits is a dollar deposit held outside US

Question 11

history of euro dollar market

Answer 11

-started in 1957 with 3 functions

1. russians acquired US dollars but were reluctant to deposit at US banks
2. UK banks turned to US dollar business due to restrictions introduced by Bank of england
3. abolition of European payment union and restoration of convertibility of Europeans currencies

Question 12

the extent to which regulation played a role euro banks development

Answer 12

what made it grow so fast was increased regulation of domestic banking activates by us authorities

us banks developed eurobanking activities to avoid regulations

in dec 1981, fed legalized international banking facilities and allowed US banks to conduct to Eurobanking business free of regulation in the USA by maintaining separate books for the business