Question

What are the three basic sources of risk for market participants holding Eurodollars? Explain Explain

Answer 1

There are three basic sources of risk associated with

holding Eurodollars.

1 Authorities interfere in repatriation of interest or principal of deposit.

The first concerns the chance that authorities where a Eurodollar deposit is held

may interfere in the movement or repatriation of interest or principal of the deposit.

But this risk factor does not necessarily imply that Eurodollar deposits are riskier than dollar deposits held in the united states.

The riskiness of a Eurodollar deposit relative to a dollar deposit held in the United States

can depend on the deposit holder’s residence.

For United States residents, Eurodollars may appear riskier than domestic deposits because of the possibility.

that authorities in the foreign country where the deposit is located may interfere in the movement or repatriation of the interest or principal of the deposit.

Foreign residents,

Iranians for example, may feel that the United States Government is more likely to block their deposits than the British Government.

Consequently, Iranians may perceive greater risk from potential government interference

by holding dollar deposits in the United States than by

holding Eurodollar deposits in London.

2 Legal Disputes

A second element of risk associated with Eurodollars concerns the potential for international jurisdictional legal disputes.

For example, uncertainty surrounding interaction between United States and

foreign legal systems compounds the difficulty in assessing the likelihood and timing of Eurodollar deposit payment in the event of a Eurodollar issuing bank’s failure.

3 Lack of support in financial crisis and others. A third type of risk associated with holding Eurodollars concerns the relative soundness per se of foreign banks compared to banks located in the United States. Specifically, it has been argued that Eurodollars are absolutely riskier than deposits held in the United States because deposits held in the United States generally carry deposit insurance of some kind while Eurodollar deposits generally do not. In addition, it has been argued that in event of a financial crisis banks located in the United States are more likely to he supported by the Federal Reserve System, whereas neither Federal Reserve support nor the support of foreign central banks for Eurodollar banking ac that authorities in the foreign country where the deposit is located may interfere in the movement or repatriation of the interest or principal of the deposit.