ch13_2 - Multinational Financial Management Alan Shapiro...

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1 Multinational Financial Management Alan Shapiro 9 th Edition Power Points by Joseph F. Greco, Ph.D. California State University, Fullerton
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CHAPTER 13 The Euromarkets
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3 THE EUROCURRENCY MARKETS THE EUROMARKETS -the most obvious example of the globalization of financial markets A. The Eurocurrency Market 1. Definition of Eurocurrency: a freely convertible currency deposited in a bank outside its country of origin. 2. Composed of eurobanks who accept/maintain deposits of foreign currency 3. Dominant currency: US$
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4 THE EUROCURRENCY MARKETS B. Growth of Eurodollar Market caused by restrictive US government policies, especially 1. Reserve requirements on deposits, such as smaller percentage of deposits can be lent out 2. Special charges and taxes, such as the Federal Deposit Insurance Corporation fee payment 3. Required concessionary loan rates (lower rates to some certain borrowers)
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5 4. Interest rate ceilings, and this limits the ability to compete for funds and lower the return on loans. 5. Rules which restrict bank competition, this will not increase the efficiency of the banking sector.
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6 THE EUROCURRENCY MARKETS C. Eurodollar Creation involves 1. A chain of deposits 2. Changing control/usage of deposit An example is in next slide
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7 A Swedish firm, Leksell, has a 1 million US$ check drawn on Citibank, NY. First, in balance sheet, Leksell has an asset of 1 million US$ (demand deposit in Citibank), and Citibank has a liability of 1 million US$ due Leksell.
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8 Second, realizing Citibank cannot pay interest on corporate checking account, Leksell decides to place the funds in a time deposit with Barclays Bank in London. Consequently, 1 Million Eurodollars created by substituting a
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ch13_2 - Multinational Financial Management Alan Shapiro...

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