Question

Relate the Eurodollar market to the external currency market. Who participates in the Eurodollar market and why?

Answer 1

Euro-dollars have come into existence on account of the Regulation issued by the Board of Governors of the U.S. Federal Reserve System, which does not permit the banks to pay interest to the depositors above a certain limit.
The eurodollar market dates back to the period after World War II. Much of Europe was devastated by the war, and the United States provided funds via the Marshall Plan to rebuild the continent. This led to wide circulation of dollars overseas, and the development of a separate, less regulated market for the deposit of those funds. The eurodollar market is one of the world's primary international capital markets. They require a steady supply of depositors putting their money into foreign banks. These eurodollar banks may have problems with their liquidity if the supply of deposits drops.In this market, loans are made in the form of Eurodollars and products are denominated in the US currency. However, because transactions are typically $1 million or more, only large institutional investors participate in this market.