I’m a little unclear on what exactly a Eurodollar deposit is. I understand it is a loan outside the U.S that’s denominated in dollars. But why don’t we just think about the FED funds rate when talking about these loans? Who would be making these loans? American based interanational companies that need to hold some cash in dollars for dollar purchases? If that’s the case, then couldn’t such a company just keep those dollars at a bank in the US?
Apologies for the rant, answer any way you see fit…
Please see responses to your questions:
I understand it is a loan outside the U.S that’s denominated in dollars.
Eurodollars are USD bank deposits held outside the US.
But why don’t we just think about the FED funds rate when talking about these loans?
That’s a good question. LIBOR on Eurodollars closely tracks the Fed funds rate. Otherwise, there would be arbitrage opportunities.
Who would be making these loans? American based interanational companies that need to hold some cash in dollars for dollar purchases?
Not necessarily. Any company that wants to use US dollars outside the US will be using Eurodollars. Given that the US dollar is extensively used in international trade, Eurodollars are quite popular.
couldn’t such a company just keep those dollars at a bank in the US?
There is no need to maintain US dollars in the US if the company does not have US operations (for example). Also, Eurodollars are not subject to US banking regulations.
We also have a short video on this topic that might be helpful: https://youtu.be/msMS6RGdYu4
Good luck on the exam!
BullishBear Finance
Gotchya. Makes sense. I think the big thing I was missing was the different regulations- but that makes perfect sense.
Thanks,
You are welcome!
BullishBear Finance