Friday, December 24, 2021

IGNOU : M.COM : IBO 6 : UNIT 2 : Q - 1. What is Euro market? Explain the reasons of its existence.

Ans. The prefix 'Euro' tends to create confusion for many as it denoted a currency -used for financial transactions outside the country of origin of that currency, e.g. US dollar were termed as Eurodollars when they formed financial assets and liabilities (denominated in dollars) but traded outside the United States, Japanese yen traded out of Japan were termed as Euro-yen, German marks traded out of Germany were termed as Euro markets, Swiss francs traded out of Switzerland were termed as Euro franc. But after launching of the 'Euro' as the official currency of European Monetary Union (or what is also known as Euro land), Eurocurrency (or Euros) denotes the official currency of the European Union or Euro land. The currency used for financial transactions outside the country of the origin of that currency is now no more called Eurocurrency. It is rather known as Eurodollar, Euro-yen, Euro-marks, Euro-francs etc. depending on which particular currency is used for financial transaction outside the country of the origin of that currency. The transactions in Eurodollar, Euro-yen, Euro-marks etc. are known as 'Euro Markets'.

The Euro markets thrived and grew because national money markets were hobbled with regulations such as interest rate controls, reserve requirements and deposit insurance costs. The major currencies in the recent years have however gained enough non-resident convertibility that a Euro market segment was able to rise.

Euro markets facilitate hedging possibilities for corporate borrowers e.g.: American companies operating in the UK or Germany can borrow Eurodollars in' the UK or Germany without being required to go in for Sterling or German mark borrowings (that imply currency risk exposure).

An important feature of the Euro market that needs to be noted is that it is basically "deepest" in the short-term market, where 3-6 months deposits are most popular (this does not mean that funds cannot be made available for long-term deployment). Deposit instruments focus on time deposits and negotiable Certificates of Deposits (CDs). As a matter of fact Euro banks have always shown a willingness to accept deposits for various maturities-short, medium or long term. The banks take into consideration borrowers requirements and have devised various instruments for preferred maturity.

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