Thursday, August 20, 2009

Eurodollar maturities

Most Eurodollar deposits are short term (ranging from overnight loans to call money loaned for a few days out to one year) and therefore are true money market instruments. However, a small percentage is long-term time deposits, extending in some instances out to about five years. However, most Eurodollar deposits carry one-month maturities to coincide with payments for shipments of goods. Other common maturities are 2, 3, 6, and 12 months.
Even though Eurobanks do not issues demand deposits, funds move rapidly in the Eurocurrency market from bank to bank in response to the demand for short-term liquidity from corporation, government, and Eurobanks themselves. There is no central trading location in the market. Traders may be thousands of miles distant from each other, conducting negotiations by cable, telephone, or telex with written confirmation coming later. Funds normally are transferred on the second business day after an agreement is reached through correspondent banks.
Eurocurrency deposits are known to be volatile and highly sensitive to fluctuations in interest rates. A slight difference in interest rates on currency values between two countries can cause a massive flow of Eurocurrencies across national boundaries. One of the most famous examples of this phenomenon occurred in West Germany in 1971, when speculation that the German mark would be up valued brought an inflow into Germany of more than $5 billion in a few days, forcing the West German government to cut the mark loose from its officials exchange value and allow that currency to float.

No comments: