Euro Project Final (1)

8/4/2019 Euro Project Final (1)

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OFFSHORE CURRENCY MARKETS


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ACKNOWLEDGEMENTWe would like to thank Oberoi Sir for giving us this topic. It

helped us to gain hand full of knowledge about a new topic i.e

Offshore market.


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GROUP MEMBERS

NAME ROLL.NOKAVERI JAIN 20RUPAL KELKARKARISHMA LODHA 34


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Introduction to Foreign

Exchange Market!!!

A foreign exchange market is market in which currencies are

bought and sold. It is to be distinguished from a financial market

where currencies are borrowed and lent.

Foreign exchange market is the largest financial market in the

world. It has its own special features with respect to the way it is

organized, the participants in the market and the method by which

the transaction is settled.

Some salient features of forex market Location. Size of the market. 24-hour market. Efficiency. Currencies traded. Flexibility in trading.


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The foreign exchange market is the largest market in the world.

Daily trading volumes often exceed US $100 billion which is more

than 50 times the volume on the New York Stock Exchange.

Main Participants

There are four main participants in foreign exchange market. They

are retail customer, commercial banks, foreign exchange brokers

and central banks.

Retail Customer

Commercial banks Commercial banksBrokers

Central banks


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A.Retail customer:There are three types of retail customers. First, more

than 80% of retail customers are actual demanders such asimporters, exporters, travelers, etc. Second, some retailcustomers are arbitragers who seek arbitrage from anyforeign currency trading. The last retail customers arespeculators. They are looking for extra profits throughforeign exchange trading.

B. Banks:Commercial banks buy and sell foreign exchanges for

their clients. In order to do these transactions, commercialbanks should hold foreign exchange deposits with banks inforeign countries.

C.Foreign Exchange Brokers:In the U.S., (some in New Zealand) banks utilizing the

foreign exchange market usually do not transact directly witheach other but rather transact by the use of foreignexchange brokers. The role of brokers is to arrange atransaction between two parties only. Brokers cannot own theforeign exchange involved. Hence, brokers are free fromforeign exchange risks.

D.Central Banks:If brokers are available, then central banks usually use

brokers to intervene foreign exchange markets. If not,central banks directly contact commercial banks. Whencommercial banks run out of foreign currencies, central banks

are supposed to supply demanded foreign currencies.


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Introduction to offshorecurrency market!!!

Offshore is anything that is not onshore within the

boundaries of where you presently live. In other words, any place

outside your homeland is considered offshore. Every country is

offshore to every other place. And each jurisdiction has its own

ever-changing laws and political aspirations.

Offshore currency markets are those where a resident of a

domestic country trades in a currency of foreign origin say for e.g.

an Indian having a trading a/c in London and trades in GBP or USD

or in any other currency other than Indian Rupee. With

liberalization in the domestic regulations and globalization of

financial markets abroad, an increasing number of Indian companiesare raising funds in international financial markets. Typically the

operations are in Eurocurrency markets, which provide larger

access at competitive rates.

Eurocurrency market or offshore market as they are called is

an international capital market which specializes in borrowing and

lending of currencies outside the country of issue. Thus deposits in

dollars with a bank in London are Eurodollars. Similarly, Japanese

yen held by banks in London is euro yen; pound-sterling held by

banks in the Germany is euro sterling, and so on. The main centers

of Eurocurrency are London and a few other places in Europe. The


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growth of the market has extended beyond these limits and

includes a few centers of Asia too, such as Singapore and Hong

Kong.

The offshore currency market is very big in size and the

participants in this market are many so it makes this market more

lucrative and attractive to the investors all around the world. Even

though the market is growing but there are some problems

attached to it as investors have some restrictions in maintaining

the amount to be invested in other currencies and markets.


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DEFINItION!!!

Euro-currency market can be defined as an international

financial market which specializes in borrowing currencies

from resident and non-resident, outside the country of

issue of the currency. This market therefore consists of

specific banking operation of accepting deposits and giving

loan in non-resident currencies. Such deposits and loan are

called Euro-bank. The location where Euro-bank undertake

such transactions are called Euro-currency market.

A special feature about the definition of market is the

importance of the` location of the bank and not the`ownership of the bank or the deposit. This means that if

the London Branch Citibank (an American entity) records a

USD deposit then such a deposit holder or the bank is not

critical.


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ORIGIN!!!The concept of Euro-currency transaction started in

Europe. Over a period of time, this financial activity has

spread to different location in the world and is now

referred to as the off-shore market. (the term `Euro

used as a prefix indicates an `offshore transaction) The

need for developing such a market came from the desire to

disguise ownership of foreign currency deposits while

continuing to have claim on such deposits. Therefore this

market provides an environment where asset and liabilities

in the from of deposits and credits can be created outside

the regulatory supervision of the monetary authority

pertaining to a currency. Thus, a deposit in USD created

out side USA become a Euro-dollar deposit; a deposit in

GBP created outside UK would be called Euro-sterling

deposit, etc.


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Evolution of offshore currencymarkets!!!

The foundation of modern euro currency was laid in 1949. The

new Chinese Communist government apprehended that their $

earnings would be blocked by the U.S.A, to overcome the threat,

it began to disguise its $ earnings by placing them with a Russian

owned bank in Paris. Following the outbreak of the Korean war in

1950, the USA blocked Pekings identifiable $ balances in the

USA. Fearing similar action against their holdings, the Russian

banks in Paris and London began disguising their balances by placing

them with banks in Western Europe instead of directly depositing

them in New York. Thus the Western Banks had claims on $

balances in the USA and the communist depositors had similar

claims on the Western Banks.Another contributing factor was the decision taken by the

British government in late 1957 to impose a ban on new overseas

loans, denominated in sterling to finance trade between countries

outside the sterling area. During the same period, exchange control

restrictions were relaxed throughout Western Europe, affording

commercial banks the freedom to conduct foreign exchange

business and to accept deposits in foreign currencies. The situation

was utilized by the London banks to offer their restricted non-

sterling area clients the alternative of financing in $.


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The real impetus for the growth of Euro$ came from certain

developments in the USA itself. Regulation Q of the Federal

Reserve act provided mandatory ceilings on interest rates that

could be paid in bank deposits. Under the regulations, no interestwas payable on bank deposits of less than 30 days duration, while

interest rates for longer terms were governed by strict ceilings.

Thus the interest rates payable on $ deposits in the USA was

restricted, while no such restriction was there for deposits outside

the USA. By offering higher interest rates than those prevailing in

the USA, banks operating outside the USA were able to attract

substantial $ deposits from non US residents. The higher interestalso resulted in transfer of some of $ balances kept by foreign

investors in New York to outside the USA. Initially, these deposits

were placed with banks in London, as they had a ready use of

these funds in foreign exchange business and lending to non-

sterling areas. Thus London gained prominence as a financial centre

for Euro currency.

Another regulation that encouraged flow of funds from the

USA to European centers was regulation M of the Federal Reserve

act. This regulation required the banks to maintain certain % as

reserves against deposits. Except for a brief period, this

regulation was not applied to deposits of European branches of US

banks. This resulted in the cost of operations lower in Europe as

compared to that in the USA. A part of the economy in operationscould be passed on the customers in the form of higher rates of

interest on deposits at the European centers. The absence of

regulations encouraged some US banks to move some of their


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depositors a/cs, including those of Americans, to the European

markets.

All the factors thus far mentioned encouraged the flow of

funds into the Eurocurrency markets. Certain other factors

ensured its sustenance by creating adequate demand for the funds

thus generated. One such factor was the controls and restrictions

on borrowing funds in the US fro reinvestment abroad, begun as a

voluntary restraint programme in 1965 and made mandatory in

1968. As a result of the restrictions, the borrowers were driven

to seek loans outside the US market and naturally resorted to the

Eurocurrency markets.

This was how the offshore or the Eurocurrency market came

into existence.


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Advantages of offshore currency

markEts!!!1.Access to stable financial markets:-

It provides access to politically

and economically stable jurisdiction. The people investing in

these markets are investing where there money is safe and

away from the restrictions of the domestic currency

markets.

2. Government regulation is less:-

Those investing in the offshore

market are free from stiff government regulations andrestrictions as they are not bound by the domestic

government rules they tend to invest more and create

liquidity in the markets which results in more and more

investors attracting towards the markets.

3.Helps borrowing and lending of currencies:-

The major advantage of thesemarkets is that it helps in the exchange of currencies at a

global level and facilitating export, imports and all such

transactions requiring foreign currencies it also act as a major

borrower and lender of foreign currencies.


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4.Provides investors with more investment avenues:-

Offshore finance is one of the

few industries, along with tourism, that geographically remote

island nations can competitively engage in. It can help

developing countries source investment and create growth in

their economies, and can help redistribute world finance from

the developed to the developing world. It also provides

investors with investments avenues they never thought they

may invest in like junk bonds, ADRs etc.

5.Makes the domestic currency more open in the market:-

These markets provide the global

platform to the local currency and encourage trades in the

currency of the domestic country.

6.Enables companies to go global money wise :-

Offshore markets helps the domestic

companies to trek the international market for their need

for finance and all other need of business funding let it be

for working capital, expansion or for acquiring any firm etc,

it gives the companies an extra avenue to chalk out their

finances


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Disadvantages of offshorecurrENcy markEts!!!

1.Domestic currency is fully convertible:-

Once the domestic currency is

trading in the offshore market it has to be fully

convertible then only it can be traded so this opens a

gap where the currency risk comes fully convertiblecurrency can be traded and can bring insecurity in the

minds of the domestic investors as it can turn up or

down any time.

2.Speculation in the domestic currency increases:-

The offshore currency markettrades many currencies so at a time the investor can

trade in n no of currencies as more and more trades are

done the volatility in the currencies increases and the

speculations in the market increase leading to some

degree of market making for a particular currency.


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Types of offshore currencymarkets!!!

The offshore currency market is a big market and the people

investing in it are in huge numbers but the market consist of 2

main types:

1)Spot Market2)Future Market

Spot Market:

Spot currency trading represents the most widely used foreigncurrency instrument. The spot foreign exchange market basiccharacteristics contributing to its popularity are:

High volatilityVolatility represents the degree of price fluctuation of aparticular currency for a specific time period. This meansthat a particular currency pair may change its price with asmany as 150 - 250 pips for as little as several seconds. Thismight represent a great opportunity for quick profits and yet,quick losses as well.

High liquidityIn a spot deal, the bilateral contract between two partiesexchanging currencies is based on a predetermined exchangerate within two business days of the contract date. The only


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exception to the 2-day rule is the Canadian dollar since thespot delivery is done in the next business day.

Those are the characteristics lead to minimization of the credit

risk on the spot market.

Forward Market:

It is the market where by an

agreed amount of foreign currencies are bought and sold for a

specified future delivery at a predetermined rate of exchange.

The basic characteristics of the forex forward market are:

1.Decentralization

This allows traders form all over the world to enter intodifferent deals either by using the services of a broker or onone-on-one basis.

2.No standard regarding the settlement datesThe settlement dates that are established on the forwardmarket can range from 3 days to 3 years. Currency swaps arerarely longer than a year but in principle no technicalrestrictions exist to execute such a deal. The onlyrequirement is that the date is a valid business day for thecurrencies that are part of the deal.


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cONcEPt OF OFFsHOrE BaNkING!!!Non-resident banks in an offshore financial centre, conducting

euro-currency (offshore) transaction are said to be undertakingoffshore banking activities. Bank branches operating at such center

are called Off-shore banking units (OBUs). Offshore banking is

thus an extension of the Euro-currency concept used in offshore

centers.

This concept has been introduced in India through Special Economic

Zones (SEZS). Branches of Indian banks operating throughSEZs

are permitted to undertake activity in non-resident currencies.

Effectively , such branches will operate as minimum star-up capital

of USD 10 million and their balance-sheet are constructed distinct

from the parent bank.

A special Economic Zone (SEZ) is an area within a country that is

treated as foreign territory for the purpose of the tariffs and

duties. The units located in a SEZ do not have to pay customs

duties on good they import or local levies on goods bought from the

rest of the country. SEZ,s have more liberal laws in relation to

labour, foreign investment etc. than the rest of the country . the

objective is to create a legal environment to boost export.

The concept of Special Economic zone (SEZs) was introduced in the

third revision to the Export-import Policy 1997-2002. OffshoreBanking started in India from 2002. Branches of bank in India

located at special economic Zone are accorded the status of

`Offshore Banking Units.


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Hence we would like to conclude that the contemporary

international offshore market place is becoming increasingly more

competitive with each passing year. The market is also expanding

day by day and the reason behind its expansion is that it providesits investors with better investment avenues, it helps exchange of

currencies at global level and government regulation is also very

less which add a feather in the cap of Offshore currency market.

Documents

Euro Project Final (1)