Jim Woolly:
I'm not looking for a kiss anywhere on my anatomy, Jim, I hope you understand, but a Eurodollar is just an American dollar held outside the U.S., usually by banks in Europe or Asia (see, it doesn't have to be Europe, Eurodollars exist in Australia, South Africa), originally as the result of payments made to overseas companies.
The key distinction about eurodollars was that they were/are lent and borrowed at LIBOR, the London Interbank etc. rate which was set in London, and form the basis for international currency swaps as well as international (read: offshore) borrowing by entities in the international reserve currency.
So, Household Finance (a US entity) could go to the euro market and borrow at a fixed or floating rate, borrowing from anonymous investors (the famous "Belgian dentists") who wanted to lend in dollars and receive income (anonymously, these are all done in bearer form) in dollars. If a Swiss company, say Nestle, borrowed from this same pool of investors, it would then enter into a swap to take its fixed/floating rate dollar obligation and put it into fixed/floating rate Swiss francs so that its sources of funds (domestic sales) would match its fiscal obligations (ultimately, post-swap, in US dollars). Since Nestle has a lot of dollar source income (which see, Nestle's Crunch Bar, a childhood favorite of mine), it could try to match, but probably wouldn't. Instead, it would use currency forward contracts to manage its product based income stream (you don't want to be paid in a falling dollar if you manufactured your product with an expensive franc), and deal with its financing (Eurodollar fixed/floating) issues separately.
The world of swaps, of course, with their previously incredibly fat spreads (1980s) and now famously razor thin spreads (new millenium) is often trotted out as the eventual bugbear of the world's economy, what will bring us all down. Could be. Places like JPM and C have enormous derivatives (swap and others) books, where the ultimate risk and liabilities are very, very mysterious.
FYIAFLIYSD (for your information and further learning if you so desire):
"EURODOLLAR DEPOSIT
Dollar deposit claims upon United States Banks deposited in banks located outside the U.S., including foreign branches of U.S. banks, so that the funds do not physically leave the U.S. banks. These dollar deposit claims in turn may be re-deposited in other foreign banks, lent to business enterprises, invested, or retained to improve reserves or overall liquidity, reflecting the acceptability of dollars as a key reserve currency. The Eurodollar market is principally maintained by commercial banks in London, Paris and other European cities that are willing to accept such U.S. deposit claims as time deposits or CD's in negotiable form. Such deposits may also be transacted in other currencies."
ftb.ca.gov |
