FINS5550_International Banking_2007 Semester 1_Tutorial 4.docVIP

Tutorial 4: Review Questions: Euro Debt Markets 1. Identify the differences between intermediated and non-intermediated flow of funds in euro debt markets. The former refers to the process of channelling loanable funds through a financial intermediary. Both the surplus unit (lenders or depositors) and deficit unit (borrowers) take a fiduciary relationship with a financial intermediary. While the latter refers to debt instruments issued by borrowers in their own name to the capital market directly usually with a help from an investment bank acting as an underwriter. Disintermediation Disintermediation refers to the process of financial flows between borrowers and lenders without an intermediary. Disintermediation presents some problems for the regulators and governments because the proportion of total domestic credit under the direct control of regulators becomes lower with a consequence of a diminished effectiveness of monetary policy, and to the extend that intermediaries perform the role of credit allocation to strategic areas and disadvantaged borrowers, reduced importance of their role has an implication for credit allocation. However, disintermediation in the eurocurrency markets may not pose uniquely external problems because it may be a general trend away from financial intermediation which affects both internal and external markets equally, and if disintermediation is unique to the eurocurrency market, domestic banks will benefit as funds will move from euromarkets to domestic markets. 2. What is a eurocurrency? Is it money? What functions do they perform? Also explain the functions of eurobanks. a) A eurocurrency refers to a time deposit issued by a eurobank in a currency denomination other than the local currency of the issuing market2. b) Despite the term ‘currency’ eurocurrency is not currency in the usual respect. A currecncy is a monetary unit that is a legal tender in a country that performs (1) Medium of Exchange: The character