trade rather than transactions with non-bank depositors or non-bank borrowers. The BIS
figures for the size of the Eurocurrency system net out all the Interbank transactions. The
BIS figures, which are the most commonly reported ones, treat the system only as a
financial intermediary. If the covered interest arbitrage and foreign exchange hedging
aspects of the market are considered, a good part of the inter-bank transactions represent
legitimate economic transactions and not just reshuffling of funds within the network of
intermediaries.
ILLUSTRATIVE PROBLEMS
- XYZ Trading Co. of the United Kingdom receives $1,000,000 in payment for exports
to ABC Electronics Philadelphia, Pa. (XYZ Co., banks with Barclays- London, and ABC
banks with Philadelphia Security Bank. S 0 $/£ = 1.35.)
a) XYZ Trading Co. keeps amount in deposit in Philadelphia Security Bank.
b) XYZ Trading Co. asks its bank to transfer export proceeds to its account in
pounds sterling.
c) Instead of (b), XYZ Trading Co. transfers dollar proceeds from Philadelphia
Security Bank, and places it with its own bank as a time deposit denominated in
dollars.Show the above transactions in T-accounts of Barclays and Philadelphia Security Bank.
Hence, a Eurodollar deposit of $1,000,000 was created in (c).- a) Show the following transactions in T-accounts of the banks involved in the
transactions.
b) Indicate the total amount of Eurodollar deposits created by these transactions.
c) What is the value of the Eurodollar deposit multiplier? Identify the factors that
determine the value of the multiplier.
Transaction (1)
XYZ Co. (Netherlands) exported to ABC, Inc. (U.S.) goods valued at $1,000,000.
The importer paid by cheques drawn on Citibank (N.Y.). XYZ Co. asked its bank
(Algemene Bank of the Netherlands) to credit its account in Dutch guiders with the
proceeds of the transaction. (The exchange rate on the value date of the transaction S0
F1/$ is 2.7715.)
Transaction (2)
Algemene Bank places the $1,000,000 it has in Citibank (N.Y.) as a time deposit
in Shanghai – Hong Kong Bank (Hong Kong).