Eurodollar Deposits Research Articles

Banking and Eurodollars in Italy in the 1950s

This article challenges current interpretations of the rise of the Eurodollar market. It argues that rather than being the exclusive innovation of British banks, the Eurodollar market had also Italian origins. Foreign-currency lending in Italy in the 1950s was characterized by competitive behavior. I explain the accumulation of Eurodollar deposits by Italian banks as resulting from the fact that nonresident foreign-currency deposits were not subject to reserve requirements. Furthermore, I discuss the attitudes of the Bank of Italy regarding the financing of foreign-currency credits with nonresident dollar deposits (Eurodollars) and compare the Eurocurrency liabilities of Italian banks vis-à-vis those of the City of London. The comparison facilitates an approximate estimation of the size of the Eurocurrency market in the late 1950s and, even more importantly, a recalibration of the view that the City of London was the dominant Eurodollar player from the outset.

Offshore Dollar Creation and the Emergence of the Post-2008 International Monetary System

This paper studies the transformation of the International Monetary System (IMS) in the run up to and after the 2007-9 Financial Crisis. Adopting a Money View perspective, it argues that the IMS, in contrast to wide-spread skepticism, does have a system-like quality. This paper understands the IMS as a US-centered hierarchical payments system within which short-term debt instruments are issued as credit money by various public and private financial institutions, in particular central, commercial and shadow banks. With the Fed located at the apex of the IMS, credit money forms denominated in US dollars are located highest up in the hierarchy and trade at par with each other, whilst they typically have fluctuating exchange rates to credit money forms denominated in the units of account of other monetary jurisdictions. From this, the paper argues that the key component of today’s IMS is the 'realm' of offshore US dollar creation, which is situated in between US dollar-denominated credit money issued in the US ('onshore dollars') and non-US dollar-denominated credit money issued outside the US. In this 'offshore dollar realm', non-US financial institutions are able to create international liquidity via US dollar-denominated private credit money outside the US. paper systematically carves out the post-2008 setup of the offshore dollar realm with a focus on Eurodollar deposits, offshore money market fund shares, foreign exchange swaps and central bank swaps. With the institutional innovations materializing during the 2007-9 Financial Crisis, the IMS is now a public- private hybrid that fully mirrors the onshore US monetary system in the offshore dollar realm. This discussion paper is the first in a series of two complementary pieces on the past, present and possible futures of the International Monetary System. It lays the theoretical and historical foundation for the paper The Future of Offshore Dollar Creation: Four Scenarios for the International Monetary System by 2040, authored by Steffen Murau, Joe Rini and Armin Haas (https://ssrn.com/abstract=3191786).

The Future of Offshore Dollar Creation: Four Scenarios for the International Monetary System by 2040

In order to sketch the possibility space for the future setup of the International Monetary System (IMS), this paper develops four different scenarios that outline potential outcomes of the IMS’s evolution by 2040. These scenarios derive from the analytical exercise of adopting a Money View perspective of today’s institutional shape of the IMS. The paper argues that the IMS’s current setup crucially relies on the supply of US Dollar-denominated credit money forms issued by private and public institutions outside the United States — through Eurodollar deposits, central bank swaps as well as ‘shadow money forms’ created by non-banks such as overnight repurchase agreements, money market fund shares and foreign exchange swaps. As this ‘realm’ of offshore dollar creation forms the heart of the present IMS, the four scenarios project potential institutional developments in coming decades following different trajectories. The Continued Dollar Hegemony scenario depicts the sustained dominance of private international money creation via offshore dollars within the Pax Americana. The Competing Monetary Blocs scenario envisions the US, the EU, and China as three gravitational centers with private international money creation in the blocs’ peripheries via offshore dollars, offshore euros and offshore renminbi. In the International Monetary Federation scenario, countries have created a strong publicly organized IMS, comprising a multilateral framework of one international and several regional clearing unions, based upon Keynes’ ideas for an International Clearing Union. Finally, the International Monetary Anarchy scenario entails the post-crisis emergence of a non-system with a substantial breakdown of public and private international monetary cooperation and creation. This discussion paper is the first in a series of two complementary pieces on the past, present and possible futures of the International Monetary System. It is based on the theoretical and historical foundations developed in the paper “Offshore Dollar Creation and the Emergence of the Post-2008 International Monetary System”, authored by Steffen Murau (https://ssrn.com/abstract=3191981).

Near-money premiums, monetary policy, and the integration of money markets: Lessons from deregulation

Abstract The 1960s and 1970s witnessed rapid growth in the markets for new money market instruments, such as negotiable certificates of deposit (CDs) and Eurodollar deposits, as banks and investors sought ways around various regulations affecting funding markets. In this paper, we investigate the impacts of the deregulation and integration of the money markets. We find that the pricing and volume of negotiable CDs and Eurodollars issued were influenced by the availability of other short-term safe assets, especially Treasury bills. Banks appear to have issued these money market instruments as substitutes for other types of funding. The integration of money markets and ability of banks to raise funds using a greater variety of substitutable instruments has implications for monetary policy. We find that, when deregulation reduced money market segmentation, larger open market operations were required to produce a given change in the federal funds rate, but that the pass through of changes in the funds rate to other market rates was also greater.

Near-Money Premiums, Monetary Policy, and the Integration of Money Markets: Lessons from Deregulation

The 1960s and 1970s witnessed rapid growth in the markets for new money market instruments, such as negotiable certificates of deposit (CDs) and Eurodollar deposits, as banks and investors sought ways around various regulations affecting funding markets. In this paper, we investigate the impacts of the deregulation and integration of the money markets. We find that the pricing and volume of negotiable CDs and Eurodollars issued were influenced by the availability of other short-term safe assets, especially Treasury bills. Banks appear to have issued these money market instruments as substitutes for other types of funding. The integration of money markets and ability of banks to raise funds using a greater variety of substitutable instruments has implications for monetary policy. We find that, when deregulation reduced money market segmentation, larger open market operations were required to produce a given change in the federal funds rate, but that the pass through of changes in the funds rate to other market rates was also greater.

Asia-Pacific Hotels International: Managing Short Term Cash in the Derivatives Market

This case deals with a cash management problem for an international hotel based in Seoul, Korea. Although successful in its core hotel operations, the firm has not been as successful in managing its short term cash flow. Part of the firm's operating and materials costs are in US dollars although all of its operating incomes are in the local currency, the South Korean won. This imbalance creates a currency risk exposure in the management of the firm's working capital. To ensure that it has sufficient funds to pay its dollar-denominated costs, the firm is considering the investment in a sizeable amount of dollar-denominated time deposits. Pursuing this strategy, however, involves a two-fold global dimension: First, the firm must determine what exchange rate conditions would make it suitable to invest in dollar-denominated time deposits rather than in the local currency. Second, for any such dollar-denominated short-term investments, the firm must decide when and how to use the facilities of the Eurodollar futures market to hedge the currency risk exposure. The specific approach being considered includes a combined position in Eurodollar time deposits and Eurodollar futures contract. This case presents an opportunity to learn how firms can successfully combine short-term investments in a foreign currency-denominated time deposit with positions in the derivatives markets, the aim of which is to manage exposure to currency risk.

The dynamic relationship between the federal funds rate and the Eurodollar rates under interest‐rate targeting

PurposePrevious literature for the relations between the market interest rates and the targeted or target rate of the Federal Reserve paid little attention to Eurodollar market rates. The present paper attempts to fill this void.Design/methodology/approachThe study investigates the dynamic relationship between the federal funds rate and three short‐term Eurodollar deposits rates. Cointegration analysis is utilized to examine the long‐run relationships between the short‐run dynamics of the market and targeted rates through a vector error‐correction mechanism.FindingsThe study shows strong evidence that, while the Eurodollar rates and the federal funds rate move together over time regardless of procedural differences in targeting, how they co‐move, especially how they adjust toward long‐run equilibrium, appears to be related to the targeting procedural changes.Research limitations/implicationsFurther research should be conducted for the theoretical analysis of strategic interactions between the monetary authority and market participants in the domestic and external financial markets.Practical implicationsThe result suggests that the Fed may affect the market interest rates through a policy of changing the federal funds rate target by a “fixed” amount for the foreseeable future. Such a policy has improved the market's ability to predict the size and timing of the changes in the target rate.Originality/valueThe results of the paper give some new insights into the interactions between monetary policy operations and market interest rates, which is of interest to researchers, monetary authorities, and financial market participants.

An empirical examination of intraday volatility in on-the-run U.S. Treasury bills

We further the empirical research on U-shaped intraday volatility patterns by investigating the U.S. Treasury bill (T-bill) market. Using hourly T-bill yields for on-the-run 13-, 26-, and 52-week T-bills from 9 a.m. to 4 p.m., New York time, over the period from January 1983 through December 2000 and using a variety of methods, we find a U-shaped intraday volatility pattern for each T-bill under each method. Our finding of a U-shaped intraday volatility pattern in the T-bill market suggests that previously identified U-shaped intraday volatility patterns in fed funds and euro-dollar deposits are not the result of unique behavior by depository institutions.

A General Model for Hedging Swaps with Eurodollar Futures

A hedging model based on a cubic spline interpolation methodology model automatically reflects timing differences between futures maturities and swap payment dates, actual maturities of the three-month Eurodollar deposits that underlie the futures contract, and the convexity bias defining the difference between Eurodollar futures and forward rates. The model allows futures with overlapping maturities to be used rather than limiting hedging to contracts that are part of the regular March, June, September, and December maturity cycle. Tests of the model for calendar year 2001 for both a single swap and a swap book show it to be effective in hedging the interest rate risk of LIBOR-based swaps.

An Integrated Approach to the Hedging and Pricing of Eurodollar Derivatives

Taking the term structure of Treasury securities and Eurodollar rates as exogenous, this article provides an integrated approach to the pricing and hedging of London Inter-bank Offer Rate (LIBOR) derivatives. Our approach allows the spread between Eurodollar and Treasury rates to reflect both the credit risk in holding Eurodollar deposits and a convenience yield from holding Treasury securities. This integrated approach includes the models of Babbs (1991), Grinblatt (1994), and Jarrow and Tumbull (1995) as special cases.

Exchange Control Risk in Eurodollar Deposits: A Law and Economics Perspective

Exchange Control Risk in Eurodollar Deposits: A Law and Economics Perspective

Bank window dressing: Theory and evidence

This study is the first to examine empirically the propensity of banks to engage in window dressing behavior. We found evidence of a systematic upward window dressing adjustment in bank assets on the last day of each quarter over the 1978–1986 period. For the 1984–1986 period, there was also evidence of reversals of temporary window dressing behavior as assets returned to permanent (benchmark) levels after the quarter-end reporting date. Money market instruments such as Federal funds, repurchase agreements, Certificates of Deposit, and Eurodollar deposits appeared to be important liability-side vehicles for upward window dressing.

Interest rate differentials on short-term securities and rational expectations of inflation

This paper tests a theorem to the effect that the difference in nominal interest rates between two securities of the same maturity but different risk is an increasing linear function of the expected rate of inflation. When inflation is modelled in a way which is rational in the sense of Muth, the evidence is highly consistent with the theorem's inferences. Estimates are also obtained of the real risk premiums that certain types of securities generate over the three-month treasury bill rate (which is assumed to be risk-free). These range from three basis points for three-month finance paper to 16 basis points for three-month Eurodollar deposits.

A theorem on interest rate differentials, risk and anticipated inflation

This paper develops a theorem to the effect that the difference in nominal interest rates between two securities of the same maturity but different risk is an increasing linear function of the anticipated rate of inflation. Even when society's inflationary. A preliminary attempt is made to estimate the real risk premiums that finance paper, bankers's, acceptances, commercial paper, certificates of deposit, and Eurodollar deposits command over treasury bills. It is found, for example, that the real risk premium commanded by bankers’ acceptances over treasury bills is five basis points. This means that in a non-inflationary environment, bankers' acceptances would yeild five basis points more than treasury bills. This estimate and the other estimates obtained are not implausiable, but they are probably minimum estimates because of bias in the estimate of inflationary expectations.

Liquidity creation and maturity transformation in the Eurodollar market

This article constructs a unified framework describing the process of liquidity creation in the Eurodollar market. It lays to rest the perceived dichotomy between multiplier and asset substitution approaches to the Eurodollar market by showing the role of each. Views holding the Eurodollar market responsible for a large increase in U.S. net liquidity (an increase in the supply of the medium of exchange or in its velocity) are found to be unjustified. When $1 is shifted from domestic commercial bank time deposits to Eurodollar deposits, about 10¢ is added to the U.S. medium of exchange. Additional effects, such as increased velocity of the existing medium of exchange, are found to be small, even when account is taken of OPEC Eurodepositing.

Reserve Requirements on Eurocurrencey Deposits: Implications for the Stablization of Real Outputs

The development of closer links between domestic financial markets and the Eurocurrency markets has provided an incentive for further investigation of the implications of placing reserve requirements on Eurocurrency deposits. In this paper a rational expectations model of a two-country world economy described in Section II is employed to analyze the impolications of placing a reserve requirement on Eurodollar deposits for the stabilization of real outputs.

Reserve Requirements on Eurocurrency Deposits: Implications for Eurodeposit Multipliers, Control of a Monetary Aggregate, and Avoidance of Redenomination Incentives

In this paper a two-country model of international financial markets is employed to analyze some implications of placing reserve requirements on Eurocurrency deposits. The features of this model are described in Section II. Many earlier analyses of the Eurocurrency markets focused on Eurodeposit multiplier, the response of equilibrium holdings of Eurodeposits to an autonomous shift from domestic deposits into EUrodeposits. The analysis in Section II is a continuation of this tradition; there the model is used to trace out the implications of a shict from domestic demand deposits to Eurodollar deposits for equilibrium holdings of Eurodollar deposits and total Eurocurrency deposits. The approach of recent contributions to analysis of monetary policy maknig has been to evaluate alternative operating procedures and suggested changes in financial regulations under various assumptions aboud the relative magnitudes of different kinds of shocks to the economy. This is the approach adopted in Section IV where teh effects of changes in Eurocurrency reserve requirements on the deviations of a monetary aggregate from a chosen target value are investigated. There it is assumed taht the authorities set the supply of high-powered monety in an attempt to achieve a desired value for a monetary aggregate, which is their intermeidate target. Deviations between the actual and desired values arice because the authorities have incomplete current information about the shocks which buffet the financial system. In Sections II, III, and IV one possible system of Eurocurrency reserve requirements is analyzed. In Section V it is demonstrated that under some alternative systems the imposition of Eurocurrency reserve requirements may give rise to an inventive for Eurocurrency deposits denominated in one ore the other ucrrency to be redenominated so that all Eurocurrency deposits are denominated in a single currency. This section also includes a discussion of how structure Eurocurrency reserve requirements so as to avoid giving rise to redenomination incentives. Section VI contains some conclusions.

Demand and Supply Functions for Stocks of Eurodollar Deposits: Reply

over this business would depend upon the size of the advantage and the rate with which the advantage becomes recognized. The apparent parabolic growth path displayed by Eurodollar deposits so far is consistent with theories of the early stages of a new product. The path of Eurodollar expansion can be formulated as a cumulative response to a gradually recognized cost advantage. Such factors as the stringencies of Regulation Q ceilings on interest rates and the exchange controls can be viewed as sources of the residual variation from the growth path.

Demand and Supply Functions for Stocks of Euro-Dollar Deposits: An Empirical Study: Comment

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Structural Change in the Euro-Dollar Market: Evidence From a Two-Equation Model

This paper describes a two-equation supply-and-demand model for 3-month Euro-dollar deposits, and discusses the results of estimating a reduced-form equation for the determination of the interest rate on such deposits. The objectibe is to emphasize the differences between the estimation results for the period 1966-68 and those for 1969-70. Multicollinearity among the explanatory variables complicates the interpretation of the estimates, and thus there is also a discussion of the tests developed by Farrar and Glauber for determining the degree and location of multicollinearity.