The Salient Features Of Eurocurrency Markets

Eurocurrency market, also known as Eurodollar market, is an international capital market which specialises in borrowing and lending of currencies outside the country of issue. Thus deposits in dollars with a bank in London are Eurodollars. Similarly, French francs held by banks in London are Eurofrancs. They are all eurocurrencies.

The Salient Features Of Eurocurrency Markets

The following are the salient features of the Eurocurrency market:

1. Transactions in each currency take place outside the country of issue. The utility of the currency is entirely outside the control of the central bank of the country issuing the currency.

2. Even though the currency is utilised outside the country of origin, it has to be held only in the country of issue. Thus a Japanese bank may keep dollar bal-ances with Amex Bank, London, which is a Eurodollar deposit. The Amex Balk will maintain the balance in its name at New York.

3. Eurocurrency market is not a foreign exchange market. It is a market for deposits with and between banks and for loans by banks to non-bank public. The currencies are lent and borrowed unlike in the foreign exchange market where the currencies are bought and sold.

4. The transactions in the market involve large amounts running into millions of dollars. The competition is acute and the margin is thin.

5. The rate of interest is generally floating. The interest is linked to a base rate, usually the London Interbank Offered Rate (LIBOR). The interest on the deposit or advance would be reviewed periodically and changed in accordance with the change, if any, in LIBOR.

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