Introduction

Abstract

Traditionally, when someone obtained a foreign-currency asset, whether it be a bank deposit, a bond or some other financial instrument, he would acquire a claim on a bank or corporation in the country whose currency was involved. Thus a deposit held by a German citizen and denominated in dollars would be held in a U.S. bank. Similarly, bonds denominated in dollars would be those issued by a U.S. company. However, this view of the world is no longer an accurate representation of international financial transactions. It is quite possible for a European citizen to hold a deposit denominated in dollars but which would be held at a bank located in London, Zürich, Frankfurt or some other major financial centre. This deposit is called a euro-dollar deposit. In general, any such deposit located at a bank in one country but denominated in the currency of another is called a euro-currency deposit. Similarly, a bond denominated in dollars and issued, for example, by a German or French company is labelled a euro-dollar bond. In addition, euro-bonds may be denominated in other currencies as well. Institutions dealing in these financial instruments comprise what is commonly referred to as the euro-currency system.