EURO CURRENCIES MARKET

NAME CLASS COURSE NAME ROLL NO. NAME OF THE COLLEGE

: : : : :

ANKITA DILIPKUMAR SAWANT M.COM (SEMISTER II) ACCOUNTING & AUDITING 1069 MAHARSHI DAYANAND COLLEGE OF ARTS, COMMERCE & SCIENCE PAREL, MUMBAI NO.:400 012

SUBJECT PROJECT NAME

: : EURO CURRENCIES MARKET

MASTER OF COMMERCE ACCOUTING & AUDITING Semester II (2012-2013) Submitted, In partial fulfilment of the requirements for the Award of degree of master of commerce Accounting & auditing Submitted by, ANKITA DILIPKUMAR SAWANT. ROLL NO.: 1069 Under the guidance of Dr. Anuja P.

MAHARSHI DAYANAND COLLEGE OF ARTS, COMMERCE & SCIENCE PAREL, MUMBAI - 400 012.

MAHARSHI DAYANAND COLLEGE OF ARTS, COMMERCE & SCIENCE PAREL, MUMBAI 400 012. CERTIFICATE This is to certify that Ms. / Mrs. ANKITA DILIPKUMAR SAWANT. Of M. COM Accounting & Auditing (2012- 2013) has successfully completed the Project on EURO CURRENCIES MARKET Under the guidance of Dr.Anuja P.

Course Coordinator

Principal

Project Guide / Internal Examiner

External Examiner

DECLARATION I ANKITA DILIPKUMAR SAWANT Student of M. COM. (Accounting & Auditing) Semester II (2012 2013) Hereby declared that i have completed the project on EURO CURRENCIES MARKET. The information Submitted is true & original to the best of my knowledge.

Signature of Student. Ankita Dilipkumar Sawant. ROLL NO 1069

ACKNOWLEDGEMENT

I owe a great many thanks to a great many people who helped and supported me during the writing of this book. My deepest thanks to Lecturer, the Guide

of the project for guiding and correcting various documents of mine with attention and care. He has taken pain to go through the project and make necessary correction as and when needed. I express my thanks to the Principal of, MAHARSHI DAYANAND COLLEGE OF ARTS, COMMERCE & SCIENCE, PAREL, MUMBAI NO. : 12 for extending his support. I would also thank my Institution and my faculty members without whom this project would have been a distant reality. I also extend my heartfelt thanks to my family and well wishers

INDEX

1. INTRODUCTION OF EURO CURRENCY MARKET It is a market for Borrowing and Lending of currency at the centre outside the country in which the currency is issued. It is different than the Foreign Exchange Market, where in the currency is bought and sold. Euro () is a single currency which was launched on 1st Jan 1999. (With 11 of 15 member countries of the European Union participating in the experiment).Now Euro () is the official currency of 16 of the 27 member states of the European Union (EU).These 16 states include some of the most technologically advanced countries of the European continent and are collectively known as the Euro zone. The Euro is an important international reserve currency. Euros have surpassed the US dollar with the highest combined value of cash in circulation in the world. The name euro was officially adopted on 16 December 1995. The euro was introduced to world financial markets as an accounting currency on 1 January 1999,replacing the former European Currency Unit (ECU) at a ratio of 1:1.The currency was introduced initially in non-physical forms, such as travellers checks and electronic bank in Euro coins and banknotes entered circulation on 1 January 2002.The Euro is administered by the European Central Bank (ECB) based in Frankfurt, and the Euro system, comprising of the various central banks of the Euro zone nations. The states, known collectively as the Euro zone are Austria,Belgium,Cyprus,Finland,France,Germany,Greece,Ireland,Italy,Luxembourg,Malta, the Netherlands, Portugal, Slovakia, Slovenia and Spain. The currency is also used in a further five European countries, with and without formal agreements. and is consequently used daily by some 327 million Europeans. Over 175 million people worldwide use currencies which are pegged to the euro, including more than 150 million people in Africa.

The most important implications of having a common currency, the Euro, are: 1. Exchange rate certainty while travelling across Europe 2. No exchange risk and, therefore, no cost of hedging against it 3. No transaction costs 4. Increased transparency and fewer transactions for importers and exporters 5. Increased liquidity in the United Euro financial market

2. FEATURES EURO CURRENCY MARKET: 1. Types of transactions 2. Control of the country of issue of the currency 3. Huge amounts of transactions 4. Highly competitive Market 5. Floating rates of interest based on LIBOR 6. Dominance of Dollar denominated transactions 7. Four different segments Types of transactions: Japanese Exporter, earning USD, keeps these USD in London Bank (say AMEX)as Deposit. AMEX bank may use such deposits for lending to a French Importer. Indian exporter, earning Japanese Yen, keeps these Yen in Korea as Deposit .Nigerian Importer avails loan in INR from Russia to import machinery from India. Huge amounts of transactions: Generally they are in only millions of USD. This has lead to Syndication of loans, where large numbers of banks participate in the lending operations. It also consists of pool of large number of short term deposits, which provides the biggest single source of funds for commercial banks. Highly competitive Market: There are no entry barriers. There is free access to the new institutions in the market. The lending rates are low and deposit rate are high, thus allowing a wafer thin margin for operations. Consumers, i.e. investors and borrowers derive advantage out of this situation.

Floating rates of interest based on LIBOR: The rate of interest in the market is linked to the Base Rate usually LIBOR, i.e. London InterBank Offered Rate .The rate of interest on advances and deposits is reviewed periodically and amended according to changed circumstances, if any in LIBOR Dominance of Dollar denominated transactions: Dollar is a leading currency traded in the market (about 90% to 95% market share).However other currencies are now emerging thus reducing the role of dollar somewhat (about 80% market share) 1. Euro 2. Japanese Yen 3. Pound Sterling The following five countries are responsible for the growth of the Euro-Currency Market: China (fear that its Fx in USD would be blocked).USA (indeed blocked identifiable Fx in USD in1950, federal Reserve Act, regulation Q and M; control and restrictions on borrowing funds in US in 1965, and introduction of interest equalization tax in 1963) .Korea (War broke out in 1950).Russia (erstwhile USSR) {because of their banking presence in Paris and London}.UK (policy of not granting sterling loan outside sterling area in 1957)

Segment 1: Euro-Credit Markets Tenure: Medium and Long Term Loans [up to 10--15 years 10% of loans, 5 - 8 years 85% of loans, 1- 5 years 5% of loans] provided by group of banks. 1. Amount: It is a wholesale sector of the international capital market. 2. Security: Loans are provided without any primary or collateral security. Credit rating is the essence of lending 3. Type of loan: A) Revolving [like cash credit] B) Term Credit 4. Interest Rate: Generally 1% above the reference rate, rolled over every six moths 5. Currency: Generally USD, but can be any other currency, as required by the borrower and ability of the lender. Syndication of Loan: 1. Managing banks, as desired by the borrower 2. Lead bank, generally who takes the largest share of lending 3. Agent bank, as required to take interest of the banks in syndication and complywith the procedure 4. Common assessment of the borrower and his country 5. Common documentation 6. In very few cases co-financing with IMF or IBRD is possible

Segment 2: Euro-Bonds 1. Euro-Bonds are unsecured securities 2. They are therefore issued by borrowers of high financial standing 3. When they are issued by government corporation or local bodies, they are guaranteed by the government of the country concerned 4. Euro-Bond is outside the regulation of a single country. The investors are spread worldwide 5. However foreign bonds are issued in only one country and are subject to the regulation of the country of issue. 6. Selling of EB is through syndicates of the banks 7. Lead manager advises about size, terms and timing of the issue 8. Entire issue is underwritten 9. Lead managers fees, underwriting commission and selling commission is some where between 2% and 2.5% of the value of the issue 10. Lead manager allocates the bonds to all members of the selling group at face value less their commission 11. Thereafter every member is on his own 12. They can sell to investors at whatever price they can obtain 13. Thus no two investors in the Euro-Bond market need pay the same price for the newly issued bonds Features of Euro-Bonds: 1. Most Euro-Bonds are bearer securities 2. Most bonds are denominated in USD 10,000 3. Average maturity of the Euro-Bond is 5 to 6 years 4. In some cases maturity extends to 15 years

Types of Euro-Bonds: 1. Straight or Fixed Rate Bonds 2. Convertible Bonds 3. Currency Option Bonds 4. Floating Rate Notes Straight or Fixed Rate Bonds 1. These are fixed interest bearing securities 2. Interest is normally payable yearly 3. Year is considered of 360 days 4. Maturities range from 3 years to 25 years 5. Right of redemption before maturity may be there or may not be there 6. If the right of redemption is there then redemption is done by offering anagio(premium) Convertible Bonds 1. These are fixed interest bearing securities 2. Investor has an option to convert bonds into equity shares of the borrowing company 3. The conversion is done at the stipulated price and during the stipulated period 4. Conversion price is normally kept higher than the market price 5. The rate of interest is lower than the rate of interest on comparable straight bond 6. Sometimes the bonds are issued in a currency other than the currency of the share. This provides an opportunity to diversify the currency risk as these bonds are issued with fixed exchange rate of conversion 7. Bonds with warrants: warrant is part of the bond but is detachable and traded separately, when the conversion takes place. The investor can keep the bond and trade the warrant for shares.

Currency Option Bonds 1. They are similar to straight bonds 2. Generally issued in one currency and option to take interest and principal in another currency. 3. Exchange Rate is either fixed (generally not) or is spot rate prevailing in the market three business days before the due date of payment of interest and principal Floating Rate Notes 1. FRN is similar to straight bonds with respect to maturity and denomination 2. Rate of interest however varies and is based on LIBOR + 1/8%, %, 1.5%........ 3. Rate of interest is adjusted every six months 4. Minimum interest rate clause may be included 5. Drop lock clause may also be included, which means if minimum interest rate happens to be paid then it is locked for the remaining period of the bond. 6. Generally it is found that banks issue and invest in FRNs

Segment 3: Euro-Currency Deposits 1. Euro-bonds represent the funds amassed by the bank on behalf of international borrower; Euro-currency deposits represent the funds accepted by the bank themselves. 2. The Euro-currency market consists of all deposits of currencies placed with the banks outside their home currency. 3. The deposits are accepted in Euro-currencies, as well as currency cocktails (SDR, ECU etc.) 4. The deposits are placed at call (overnight, two days or seven days notice) for USD,Sterling pounds, Canadian dollars and Japanese Yen; and of two days in any othercurrencies 5. Time deposits are accepted for periods of 1,3,6 and 12 months for all currencies 6. USD and Sterling pound can be placed for a period of five years 7. Minimum size of deposit is USD50,000 or its equivalent Segment 3: Euro-Currency Deposits Certificate of Deposit 1. It is negotiable instrument 2. They are bearer instrument and can be traded in the secondary market 3. Period: 1 year (1 month through 12 months) 4. Minimum amount: USD50,000 5. Currencies: USD, Sterling Pound, Yen 6. Interest Rate: 1/8 % below LIBOR 7. Tranche CD: carries different rates of interest for each tranche 8. Discount CD: they are issued at discount

Segment 4: Euro-Notes Market 1. This market constitutes the instruments of borrowing issued by the corporates in theEurocurrency market 2. The instruments issue may be underwritten or may not be underwritten 3. The borrowers directly approach the lenders without the intermediation of the banks or financial institution. 4. Instruments are of the following categories: 1. Commercial Paper 2. Note issuance Facilities 3. Medium Term Notes Commercial Paper 1. It is a promissory note with maturity less than a year, generally the period variesbetween 90 days to 180 days 2. Generally issue is not underwritten 3. Amount: USD 100,000 or equivalent 4. Issued on Discount to Yield basis, but interest rate works out lesser than that is paidon bank borrowing and higher than that is paid by the bank on deposits 5. They are unsecured instrument Note Issuance Facilities (NIF) 1. Borrowers place short term notes of 3 months to 6 months maturity directly with the investors 2. The notes are rolled over on maturity 3. The banks underwrite at the time of issue as well as when the notes are rolled over 4. With slight variation they are also known as: 1. Revolving underwriting facility (RUF)

2. Standby Note Issuance Facility (SNIF) 3. Note Purchase Facility (NPF) Medium Term Notes 1. MTN represents Long Term, Non Underwritten and fixed interest rate source of raising finance. 2. It can be comparable with Euro-bonds with a difference that Eurobonds issue is underwritten, where as MYN issue is not underwritten. 3. Their maturity is somewhere between short term CPs(less than one year) and long term Euro bonds (more than five years) 4. They are privately placed and have great flexibility

3.REASONS FOR THE DEVELOPMENT OF THE EURO CURRENCY MARKET There are several reasons for the existence and spectacular growth of the Eurocurrency market. They are: 1. Soviets deposit of dollar in European banks: In the1950s Soviet Union was earning dollars from the export of gold and raw materials. The soviets did not want to keep them in the banks in the United States out of the fear that the US may freeze them due to the cold war. The soviets wanted dollar claims that were not subject to any control by the US government. These soviets deposits marked the birth of the Euro currency market. 2. Restrictions upon sterling credit facilities In 1957, the bank of England introduced restriction on UK banks ability to lend sterling to foreigners and foreigners ability to borrow sterling. This induced the British banks to turn to the US dollars as an alternative means to finance the world trade. 3. Abolition of the European payments union and restoration of currency convertibility: The European payments union (EPU) enabled the European member countries to settle trade credits among themselves with the minimum use of dollars. In 1958, EPU was abolished and convertibility of European currencies ws restored. This provided another impetus to the growth of Eurocurrency market. 4. US dollar as a key currency; The fundamental causes for the development of Eurocurrency market was the special position of the dollar as a key, or vehicle, currency. The dollar continues to be the main currency that is used to carry out the international transaction.

5. Regulation Q: In 1963 the US authorities introduced Regulation Q which fixed a ceiling on the interest rate that US banks could pay on time deposits. Since this regulation did not apply to offshore banks many US banks set up subsidiaries abroad to escape the banking regulation. Further, as the interest rates in Europe rose above the ceiling fixed by US authorities, Eurodollar deposits became more profitable than US deposits. This was another important cause for the rapid and sustained growth of Eurocurrency market. 6. Convenient to hold balances abroad: International Corporation often found it very convenient to hold balances abroad for short periods in the country in which they needed to make payments. Since the dollar is the most important international and vehicle currency in making and receiving international payments, it is only natural a large proportion of the Eurocurrency to be in euro dollars. 7. Overcome domestics credit restrictions: An important reason for the growth of the euro currency market is that the international corporation can overcome domestics credit restrictions by borrowings in the Euro currency market. 8. Deposits of surplus funds by OPEC countries: After the oil price increase of 1973, the OPEC countries began to deposit large amounts of dollars in European banks. The Eurocurrency market experienced phenomenal growth after 1973. The OPEC countries also did not want to keep their dollar deposits in the United States for the fear that the US government might freeze them in a political crisis. This is exactly what happened to the (small- proportion of the ) dollar deposits that Iran and Iraq kept in the US during the US conflict with these countries in the late 1970s and early 1980s, respectively. The euro banks helped to recycle the surplus funds from OPEC countries to the deficit oil importing countries.

European banks are willing to accept deposits denominated in foreign currencies and are able to pay higher interest rates on these deposits than US banks because they can lend these deposits at higher rates. However, the spread between lending and borrowing rats on euro currency deposits is smaller than that of US banks. Thus, European banks are often able to pay higher deposits rates and lend at lower rates than US banks. This is the result of: i) ii) The fierce competition for deposits and loans in the Eurocurrency market. The lower operating costs in the Eurocurrency market due to the absence of legal reserve requirements and other restriction on Eurocurrency deposits. iii) iv) Economics of scale in dealing with very large deposits and loans, and Risk diversification

4...MARKET CHARACTERISTICS OF EURO CURRENCY MARKET

A Eurocurrency is any freely convertible currency, such as a dollar or a mark, deposited in a bank outside its country of origin. Thus, a mark held on deposit with a bank in Paris is a Euro mark and a dollar held on deposit with a bank in London is a Eurodollar. It is the residency of a bank (the location of the bank) and not its nationality that determines the "Euro" nature of the deposit so the Euro mark could be held with a Paris branch of a German bank and the Eurodollar could be held with a London branch of an American bank. The term Eurocurrency also refers to this type of deposit held in non-European financial centres, although the term "offshore currency' (This refers to Eurocurrency held in such financial canters as Tokyo, Hong Kong, Singapore and Kuwait) is sometimes used in its place. Eurocurrency deposits are typically conventional term deposits of one day to one year's duration. Conventional term deposits are non-negotiable bank deposits bank deposits that cannot be transferred, with a fixed term where the interest rate is fixed for the duration of the deposit. In Eurocurrency transactions the currency that is used is always a foreign currency to at least one of the two parties, and one of the two parties is always a bank. The other party can be another bank, a central bank, a government or a large corporate entity (a large existing organization in the form of corporation). In fact, transactions between banks and other financial institutions constitute the core of the Eurocurrency market (form or make up the central and most important part of). This interbank Eurocurrency market (The interbank market is the section of the money market in which financial institutions borrow and lend money among themselves for short periods. This has been a traditional operation among banks. Interbank Eurocurrency market is such a market that deals with Eurocurrency. The Eurocurrency market is so called because one of the parties involved is always a bank. The Eurocurrency market differs from the foreign exchanges market in that it is not concerned with buying and selling foreign exchanges but accepting deposits and making

loans in Eurocurrency. Formerly known as the Eurodollar market, the Eurocurrency market has its main operations in Europe, with others in the Asian dollar markets in Singapore and Hong Kong and others in the Middle East and the Caribbean. Characterized by its international nature, its enormous size, and its independence of the control of any particular country or organization, the Eurocurrency market has great impact on international finance. In terms of actual operation, banks in this market publically give a quotation of two interest rates the bid interest and the ask rate. The bid rate is the interest rate at which the bank is wishing to borrow money, the ask rate is the interest rate at which the bank lends money. The difference is called spread, which is the bank's gain from the business of borrowing and lending. These interest rates are commonly worked out on the basis of LIBOR is organized as an international over-thecounter market whose members are linked by telephone and telex. Access to this market is reserved to institutions of top quality. The sums involved are huge, with a million dollars the usual minimum transaction. Eurocurrency markets are outside the jurisdiction of any single regulatory authority (Eurocurrency markets are not administrated by any single regulatory authority) and the interest rates are determined by pure supply and demand.

5...CREATION OF EURO CURRENCIES AND DEPOSITS Euro currencies are created when someone who owns dollars deposits them with a bank outside USA. The euro currency market can potentially create Eurocurrencies in exactly the same way that commercial banks create money, that is, by making loans which are redeposited in the same banking system. Euro banks can generate multiple expansions of Eurodeposits on receiving a fresh injection of cash. In other words, deposits give rise to deposits which in turn give rise to deposits, may be with some leakages. Thus, euro banks can generate multiple deposits creation. This is almost like deposit creation in the domestic monetary system. In the case of domestic monetary system the cash reserve ratio is often statutorily fixed, while in the case of euro banks, the cash reserve ratio is voluntarily decided. The euro currency markets have the potential to create credit and yet remain unregulated. The rapid growth of the Eurocurrency markets in the 1960s and 1970s had coincided with a high rise in the inflation rates in the industrialised countries. According to some economists the growth of Eurocurrency markets was partly responsible for this, since the eurobanks have the ability to create deposits.

6....CHARACTERISTICS OF THE EUROCURRENCY MARKET The important characteristics of the Eurocurrency market are the following: 1. Free of government regulation: The Eurocurrency market is an important channel for mobilising funds and deploying them on an international scale. The important centres are London, paris, hongkong and Singapore. It is generally outside the direct control of any government regulation. More specially, they do not face compulsory reserve requirements, interest ceilings on deposits and so on. It is generally said that the dollar deposits and so on. It is generally said that the dollar deposits in London are outside the control of US because they are in London, they are also outside the control of British government because they are in dollars. 2. Short term nature: The deposits and loans of eurobanks are predominantly of a short term nature. The maturity nature of some deposits is as short as one day and majority are under six months. Interest is paid on all of them. The Eurocurrency loans are generally for short period three months or less. 3. Close maturity of assets and liabilities: there is a close matching of the maturity structure of assets (loans) and liabilities (deposits). This is due to the fact that eurobanks have to be cautious about the sudden large withdrawals of short term funds by the depositors. Further, the close matching of assets and liabilities reduce the risk of interest rate fluctuation to the banks. Here the deposits are for short term and lendings are for long term. Therefore it is necessary to maintain a balance. 4. Eurobanks themselves the users of Eurocurrencies A large proportion of Eurocurrencies are used by the eurobanks themselves. Those eurobanks with surplus funds loan to eurobanks having lending possibilities but are short

of funds. The other users of Eurocurrency market facilities are non eurobank financial institutions, multinational corporations, international institutions like world bank and governments. World bank frequently borrow funds from eurobanks for lending to developing countries. Multinational corporation are attached by higher interest rates paid on their deposits and competitive borrowing rates. 5. Wholesale market: Eurocurrency market is a wholesale market in the sense that their size of transactions is very large. Generally, the size of individual transaction is above $1 million. It is centered in London 6. Well organised, efficient and large market: Eurocurrency market is well organised and very efficient. It serves a number of roles for multinational business operations. It is an important and convenient device for multinational corporations to hold their excess liquidity. It is an important source of short term loans to finance corporate working capital needs and foreign trade. It is a large international money market.

7....INSTRUMENTS OF THE EURO CURRENCY MARKET 1. Time deposits: A large part of money in the Eurocurrency market is held in fixed rate time deposits. The maturities of most of them range from one week to six months. The bulk of Eurocurrency time deposits are interbank liabilities. They pay a fixed, competitively determined rate of return. 2. Certificates of deposits: Another important instruments is the Eurocurrency certificates of deposits(CD). A Eurocurrency CD is a negotiable receipt for a dollar deposit at a bank located outside the US. There also exists an active secondary market for Eurodollar CDs. This allows investors to sell Eurodollar CDs before the deposits mature. Eurodollar CDs are issued by banks to tap the market for funds and are commonly issued by banks to tap the market for funds and are commonly issued in denominations varying from $250,000 to $5 million. 3. Euro dollar floating rate CDs (FRCDs) and Eurodollar floating rate notes: FRCDs and FRNs came into use as a means of protecting both borrower and lender against interest rate risk. By making their coupon payments float with markets rate of interest, they help to stabilise the principal value of the paper. FRCDs are not very active now-a-days. 4. Note issue facilities(NIFs): NIFs became a significant Eurodollar instrument in the mid-1980s. It is an arrangement between a borrower and an underwriting bank under which the borrower can issue short term paper known as euronotes in its own name. Under such an arrangement, the under writing bank is committed either to purchase any notes the borrower cannot sell or to provide standby credit.

Euro currency interest rates: Interest rate paid to the depositors and charged for loans ;is based on London Interbank Offered Rate (LIBOR). LIBOR is comparatively as euro banks operate with a small spread that is, the difference between deposit and lending rate. LIBOR rates are calculated as the average of the lending rates in the respective currencies of lending London banks. At present, eight lending banks are involved in determining LIBOR rate. Since euro deposits and lending rates are not subject to restriction by the central banks, euro banks work with a smaller spread, that is, deposits are paid higher rate and loans are charged lower rate of interest.

8....ECONOMICS IMPACT OF EURO CURRENCY MARKET The emergence and growth of euro currency market and its ability to create multiple expansion of credit without any apparent control mechanism have given rise to certain problems and advantages.

Problems:
1. The Eurocurrency market facilities short term speculative capital flows. This creates difficulties for central banks in their efforts to stabilise the exchange rates. 2. The national monetary authorities lose effective control over monetary policy since domestic residents can make their efforts less effective by borrowing or lending abroad. Since Eurocurrency market contributes to increasing the degree of international mobility of capital it makes monetary policy less effective. 3. Since the Eurocurrency market can be a source of international liquidity it can contribute to inflationary tendencies in the world economy. 4. The Eurocurrency market allows the central banks of deficit countries to borrow for balance of payments purposes. This may make these countries to postpone the needed balance of payments adjustments measures.

Advantages:
Despite these problems arising from the growth of eurocurreny market, it has given rise to many advantages. i) ii) It has helped to alleviate considerably the international liquidity problem. It has proided credit to countries to finance the balance of payments deficits, in other words, it has played an important role in recycling funds from surplus to deficit countries. iii) iv) v) vi) It has helped to meet the short term credit requirements of business corporation It has provided a market for profitable investments of funds by commercial banks It has enabled the exporters and importers to obtain credit. This Eurocurrency market has helped to accelerate the economics development of some countries like South Korea, Taiwan and Brazil. vii) It has been largely responsible for the increase degree of financial integration between economics. The Eurocurrency markets have become important sources financial for governments and private firms. The importance of Eurocurrency market is likely to grow with the growing integration of the world economy and globalisation. Their competitive deposits and lending rates prove to be attractive for both investors and borrowers of funds.

9....TURNOVER OF THE EURO CURRENCIES

The total turnover of the euro money market was moribund in the second quarter of 2004 although there was a huge surge in the turnover in the second quarter of 2003. Such developments were discontinuous across the market. After this upturn in all the market segments in the second quarter of 2003, there was a sharp downturn in the interest rate, cross currency and FX swaps in the second quarter of 2004. This was contrasted by a rise in the turnover in the unsecured, secured and other interest rate swaps. The forward rate agreement and the short term securities also witnessed a rise. The secured segment happens to be the largest money market segment.

The overnight interest rate swap segment also saw a sharp downfall in the second quarter of 2004 although it had experienced a strong rise in the second quarter of 2003. this change is attributed to the interest rate speculation which was high in 2003 but low in 2004. The overnight interest rate swap segment of the money market is provided impetus by the EUIRIBOR-ACI.

The unsecured, secured and the overnight interest rate swap and the FX swap segments are characterized by activities that have very short term maturity periods. The instruments like the cross currency and other interest rate swaps are the money market instruments that are traded at long maturities.

10....EURO EXCHANGE RATE: US DOLLAR VS. EURO 1. After the Euro was introduced as a cash currency in2002, the US dollar began to steadily depreciate in value. This was due to a persistent increase in the US trade and budget deficit. By December 2004, the US dollar started falling against all major currencies and the Euro rose above $1.36/for the first time. An interest rate reduction by the US Federal Reserve on September 18, 2007 caused the US dollar to decline to new record lows of below $1.43 by October. In2008, the Euro strengthened further to around$1.60. At the end of March 2009, the Euro stood at$ 1.3308. Now (15.09.09) it is $ 1.4561 Exchange Rates 1 EUR = 70.963 INR or 1 INR = 0.01408 EUR 1 USD = 48.735 INR or 1 INR = 0.0205191 USD 1 EUR = 1.4561 USD or 1 USD = 0.686766 EUR * Data as on 15.09.09

11.....STRUCTURE OF THE EURO MONEY MARKET

In regard to structure, the euro money market has been less concentrated over the past years. But differences across the various money market segments continue to exist. The market that is least concentrated is the unsecured money market segment. The money market segments that are highly condensed are the forward rate agreement, other interest rate agreement and the cross currency swap segments. They constitute about 70% of the entire money market share.

The euro money market products are short term deposits, repos, EONIA swaps and foreign exchange swaps. There is an increase in the liquidity in these money market instruments that is projected by the thinning in the bidoffer spread.

THE PARTICIPANTS 1. Governments of all political categorizations 2. International organizations

3. Central Banks 4. Commercial Banks 5. Corporations 6. Supply and Demand

12....CONCLUSION The development of the International monetary system and foreign exchange market has been significantly influenced by the growth of Eurocurrency Market. But the advantages and disadvantages associated with the Eurocurrency Market have given rise to the doubt whether it is a welcome tonic or a slow poison to the international system. 1. The money market specializes in debt securities that mature in less than one year. 2. Money market securities are very liquid, and are considered very safe. As a result, they offer a lower return than other securities. 3. The easiest way for individuals to gain access to the money market is through a money market mutual fund. 4. T-bills are short-term government securities that mature in one year or less from their issue date. 5. T-bills are considered to be one of the safest investments - they don't provide a great return. 6. A certificate of deposit (CD) is a time deposit with a bank. 7. Annual percentage yield (APY) takes into account compound interest, annual percentage rate (APR) does not. 8. CDs are safe, but the returns aren't great, and your money is tied up for the length of the CD. 9. Commercial paper is an unsecured, short-term loan issued by a corporation. Returns are higher than T-bills because of the higher default risk. 10. Banker's acceptances (BA)are negotiable time draft for financing transactions in goods. 11. BAs are used frequently in international trade and are generally only available to individuals through money market funds.

12. Eurodollars are U.S. dollar-denominated deposit at banks outside of the United States. 13. The average Eurodollar deposit is very large. The only way for individuals to invest in this market is indirectly through a money market fund. 14. Repurchase agreements (repos) are a form of overnight borrowing backed by government securities.

13....REFERANCES