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INTERNATIONAL MONEY MARKET - Coggle Diagram
INTERNATIONAL MONEY MARKET
Eurocredits
Eurocredits are short- to medium-term loans of Eurocurrency
Extended by Eurobanks to corporations,
sovereign governments, nonprime banks, or international organizations
The loans are denominated in
currencies other than the home currency of the Eurobank.
The credit risk on these loans is greater than on loans to other banks in the interbank market.
:
The lending rate on these credits is stated as LIBOR + X percent, where X is the lending margin charged
depending upon the creditworthiness of the borrower
From 3 - 6 months, the loans will be rollover pricing
Forward rate agreement ( FRA)
A financial contract in which two parties agree on an interest rate for a future loan or borrowing over a specified period of time, but the contract does not require the exchange of principal
FRAs help companies and investors protect themselves from unforeseen changes in future interest rates.
The buyer agrees to pay the seller if interest rate falls below agreemen
t
The seller agrees to pay buyer if interest rate increases above agreement
A forward rate agreement (FRA) is an interbank contract that allows the Eurobank to hedge the interest rate risk in mismatched deposits and credits.
Eurocurrency Market
1. Eurocurrency Definition
Time deposits of money in an international bank located in a country different from the country that issued the currency.
Eurodollars (USD outside US)
Eurosterlings (GBP outside UK)
Euroyens (JPY outside JP)
"Euro" is a historical misnomer, not limited to Europe.
VND is not yet present in this market.
2. History and Origins
Began in the 1950s-1960s.
Soviet countries deposited USD in a
French bank ("EURO-BANK") to avoid asset freezing.
Banks accepting Eurocurrency deposits have been called Eurobanks.
Fear of US confiscation created the market's foundation.
3. Market Structure
International banking system parallel to domestic banking systems.
London has historically been, and remains, the major Eurocurrency financial center.
Where LIBOR (London Interbank Offered Rate) was originated.
Currently, following the cessation of LIBOR, SONIA (Sterling Overnight Index Average) is used as a replacement.
An “Asian dollar” market exists, with headquarters in Singapore
SIBOR is the Singapore Interbank Offered Rate
Strategic geographical location and stable political environment are key factors.
The absence of mandatory reserve requirements and deposit insurance helps reduce operational costs.
4. Operating Mechanism:
Eurobanks with surplus funds lend to Eurobanks needing funds (IOER).
Spread: 10-12 basis points (0.10% - 0.12%).
Deposit maturities: 1 night to 1 year (typically 1, 2, 3, 6, 9, 12 months).
Transactions at the interbank and/or wholesale level (USD 1 million or more).
5. Advantages:
No FDIC insurance premiums.
Lower operating costs.
Not subject to US Federal Reserve Regulation D (reserve requirements).
High liquidity.
6. Financial Instruments:
Eurocurrency Term Deposits:
Fixed maturities, penalties for early withdrawal.
Represents approximately 90 percent of wholesale Eurobank external liabilities.
Negotiable Certificates of Deposit (NCDs):
Accounts for 10% of external liabilities.
USD NCD market is more liquid than others.
Interest-bearing debt instruments, traded in the secondary market.
Began in London in 1967 for Eurodollars.
ICE LIBOR (Intercontinental Exchange London Interbank Offered Rate)
A benchmark interest rate at which major banks in London lend to each other for periods ranging from 1 day to 1 year.
It serves as a key reference rate for global financial contracts.
Originally published by the British Bankers' Association (BBA), LIBOR was taken over by Intercontinental Exchange (ICE) in 2014 after a series of manipulation scandals.
The ICE Benchmarking Authority (IBA) now sets LIBOR rates for five major currencies (USD, GBP, EUR, CHF, JPY) across seven maturities.
Due to concerns over rate manipulation and declining liquidity, the use of LIBOR has been gradually phased out in favor of alternative benchmarks like SOFR (U.S.) and SONIA (U.K.).
ICE LIBOR remains structured similarly to its predecessor, with governance having moved from BBA to ICE.
Ensure continued use until the transition to the new standard is complete.
Eurodollar Future
Cash payment contract
Contract validity is quarterly (March, June, September, December) and the last 4 months not being a quarter
Basis point (bp)
unit of measurement used in finance to describe changes in interest rates, bond yields, or other percentages.
The value of 1 basis point = Notional Principal × 0.0001 × (Days / 360)
Financial contract
hedge or speculate on the interest rates of U.S.
banks outside the United States
managing short-term interest rate risks
Implied interest rate
the market's expectations of the future 3-month US dollar LIBOR (London Interbank Offered Rate) rate.
Interest rates rise, futures prices fall.
Interest rates fall, futures prices rise.
Implied Interest Rate (%) =100−Futures Price
Euronotes
short-term bonds
agrees with an institution to issue Euronotes in its own name
Sold at a discount to face value
Maturity is typically three to six months
Eurocommercial paper
short-term unsecured debt paper
Sold at a discount to face value
The maturity is usually one to six months
denominated in euros and US dollars