Page 250 - DMGT545_INTERNATIONAL_BUSINESS

Unit 13: Basics of International Accounting and Financial Management

supply and Demand notes

The supply of and demand for funds in the Eurocurrency market come from the above participants.
Central banks of various countries are very important suppliers. The bulk of the central bank
funds are channelled through the BIS in Basle, Switzerland. The enormous oil revenue of the
OPEC has become an important source of flow of funds to the Eurodollar market. Multinational
corporations and traders place their surplus funds in the market to obtain short-term gains.
Governments have emerged as significant borrowers in the Eurocurrency market. The frequent
hike in the oil prices and the consequent increase in the current account deficits of many countries
compel them to increase their borrowings.
The commercial banks in need of additional funds for lending purposes may borrow from the
Euro market and re-lend it. At the end of the financial year, sometimes they resort to borrowing
for ‘window dressing’ also. Business corporations, especially multinationals, and traders borrow
from the market for their short term requirements.

evaluation of the eurodollar market

The advantages and dangers associated with the Eurocurrency market have given rise to the
doubt whether it a welcome tonic or a slow poison to the international system.
Advantages: The growth of the Euro market has helped to alleviate the international liquidity
problems considerably, provided credit to finance the balance of payments deficit, enabled the
exporters and importers to obtain credit, helped to meet the short-term credit requirements of the
business corporations and provide better opportunities for the investment of short-term funds.
It has provided a market for profitable investment of funds by the central banks. The supply of
funds by the Euro market has enabled commercial banks in some countries to expand domestic
credit creation and helped ‘window dressing’. The Eurocurrency has helped to accelerate the
economic development of certain countries including South Korea, Brazil, Taiwan and Mexico.
Disadvantages: Despite the many advantages of the Eurodollar as a ‘vehicle currency’ for carrying
on world trade and a source of international liquidity, there remains the unsettling prospect of a
machine, controlled by no one, that can add to the world’s money supply by creating dollars.
The Eurodollar and Eurobond markets become important sources of finance for governments
and private firms. The growing integration of the world economy and globalization of business
increase the importance of these markets.
Euro Market and India: Government of India has made use of the Euro market on several
occasions. There is an increasing realization of the importance of this market by the Indian
companies. The change in the business environment in India increases the importance of this
market for Indian business.

Task How supply and demand affect the currency market.

13.1.4 Global Bond market

A foreign bond issue is one offered by a foreign borrower to the investor in a national capital
market and denominated in that nation’s currency. As for example a German MNC issuing dollar
denominated bonds to US investor.

A Euro bond issue is one denominated in a particular currency but sold to investors in national
capital markets other than the country that issued the denominating currency. As for example,

lovely Professional university 245