Page 63 - DMGT549_INTERNATIONAL_FINANCIAL_MANAGEMENT

International Financial Management

Notes Eurodollar Creation

The creation of the Eurodollar can be illustrated using the traditional ‘T’ accounts to show the
sequence of transaction.
The following four transactions are given to you:

Transaction (1)
XYZ Co. (Netherlands) exported to ABC, Inc. (US) goods valued at $10,00,000. The importer paid
by a cheque drawn on Citibank (N Y). XYZ Co. asked its bank (Algemene bank of the Netherlands)
to credit its account in Dutch guilders with the proceeds of the transaction. (The exchange rate on
the value date of the transaction S0F1/$ is 2.7715.)

Transaction (2)
Algemene bank places the $1,000,000 it has in Citibank (NY) as a time deposit in Shanghai-Hong
Kong Bank (Hong Kong).

Transaction (3)
Shanghai-Hong Kong Bank makes a loan of $9,00,000 to Nestle Co., (Netherlands). Nestle Co.
deposits the cheque in its account with the National Bank of the Netherland and asks its bank to
credit its account with the equivalent in Dutch guilders. (The exchange rate on the value date of
the transaction is S0F1/$ = 2.7750.)

Transaction (4)
The National Bank of Netherlands makes a loan of $75,00,000 to Nova Industries (Denmark).
Nova Industries uses the loan to settle an import transaction with Bristol Myers (NY) Bristol
Myers maintains its accounts with Chase Manhattan Bank (N Y).
Solution:
a. Transaction (1)

Citibank (NY) Algemene Bank (Netherlands)
1. Deposits of ABC, Inc. Account with Citibank (NY) (1) Deposits of XYZ
- $1,000,000 +F12,771,500 Co. + F127,71,500
(Equivalent to $1,000,000)
1. Deposits of Algemene Bank
+ $1,000,000
Transaction (2)
Citibank (NY) Algemene Bank (Netherlands)
2. Deposits of Algemene Bank (2) Account with Citibank (NY)
- $1,000,000 - $1,000,000
2. Deposits of Shanghai - (2) TD with Shanghai,
Hong Kong Bank + $1,000,000 H. K. Bank + $1,000,000
Shanghai-Hong Kong Bank
2. Account with Citibank (NY) (2) TD of Algemene Bank
+ $1,000,000 + $1,000,000
Transaction (3)
Citibank (NY) Shanghai-Hong Kong Bank
3. Deposits of Shanghai - (3) Account with Citibank (NY)
Hong Kong Bank - $900,000 - $900,000
3. Deposits of National Bank of (3) Loan to Nestle Co. + $900,000
Netherlands + $900,000 Contd...

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