Euro Currency Market - 2226 Words

Definition of Eurocurrency Market The money market in which Eurocurrency, currency held in banks outside of the country where it is legal tender, is borrowed and lent by banks in Europe. The Eurocurrency market is utilized by large firms and extremely wealthy individuals who wish to circumvent regulatory requirements, tax laws and interest rate caps that are often present in domestic banking, particularly in the United States. Eurocurrency Market Rates on deposits in the Eurocurrency market are typically higher than in the domestic market, because the depositor is not protected by domestic banking laws and does not have governmental deposit insurance. Rates on loans in the Eurocurrency market are typically lower than those in†¦show more content†¦Eurocurrency loans Eurocurrency loans are made on a floating – rate basis. Interest rates on loans to governments, corporations and nonprime banks are set at a fixed margin above LIBOR for a given period and currency. Example If the margin is 75 basis points (b.p.) and the current LIBOR is 6%, the borrower is charged 6.75% for the relevant period. LIBOR is the underlying variable rate of interest, usually set for a 6 month period. --- The margin or spread between the lending bank’s cost of funds and the interest charged by the borrower is based on the borrower’s perceived creditworthiness / riskiness. The spreads can range from 15 b.p. to more than 300 b.p., the median of the range varying from 100 to 200 b.p. The maturity of the Eurocurrency loan can range from 3 to 10 years. Eurocurrency loans are made by bank syndicates. The bank originating the loan becomes the lead bank managing the syndicate, inviting one or two other banks to be co-managers of the loan. The borrower is charged a one-time syndication fee ranging from 0.25 % to 2 % of the loan value according to the size and type of the Eurocurrency loan. The drawdown [period over which the borrower may use the loan] of the loan and the repayment period vary in accordance with the borrower’s needs. A commitment fee of about 0.5 % per annum is paid on theShow MoreRelated The European Monetary Union (EMU) - The Euro as a Single Currency1608 Words   |  7 Pages(EMU) - The Euro as a Single Currency Liberalizing trade is nothing new to the world, but we have never witnessed such a vast economic integration between sovereign countries like the integration carried out in the European Union. Customs duties between European countries started to come down steadily in the early 1950s and were abolished in 1968 with the introduction of a customs union and the implementation of the common external tariff. The official proclamation of the single market on 1 JanuaryRead MoreGlobal Financing and Exchange Rate Mechanisms Paper1465 Words   |  6 Pagesis the existing market cost for which one currency can be exchanged for another (Moffatt, n.d.). 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