Eurodollar Certificate of Deposit

A Eurodollar Certificate of Deposit (CD) is a CD issued by banks outside the United States, primarily in Europe, where both the interest and principal are paid in U.S. dollars. Eurodollar CDs usually have minimum denominations of $100,000 and maturities of less than two years.
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Definition

A Eurodollar Certificate of Deposit (CD) is a time deposit account issued by banks located outside the United States, predominantly in Europe, which is denominated in U.S. dollars. These deposits are certificates that earn interest for the bearer, and the principal and interest are paid in U.S. currency. Eurodollar CDs typically have minimum denominations of $100,000 and generally feature short-term maturities, typically less than two years. They offer investors a secure method to earn interest income on large sums of money held in a stable currency, while providing financial institutions outside the U.S. with access to U.S. dollar funding.

Examples

  1. Corporation Investment: A multinational corporation based in the UK may invest surplus cash in Eurodollar CDs to earn interest on its dollar reserves without currency exchange risk.
  2. Bank Funding: A Swiss bank may issue Eurodollar CDs to attract U.S. dollar deposits from global investors, using the funds for lending or other investment activities denominated in dollars.
  3. Pension Fund Strategy: An American pension fund looking for short-term investment options outside the U.S. banking system might purchase Eurodollar CDs to diversify its portfolio with dollar-denominated fixed-income instruments.

Frequently Asked Questions

What differentiates a Eurodollar CD from a domestic U.S. CD?

A Eurodollar CD is issued by banks outside the United States and denominated in U.S. dollars, whereas a domestic U.S. CD is issued by banks within the United States.

Why would an investor choose a Eurodollar CD?

Investors might choose a Eurodollar CD to earn interest on U.S. dollars without the exchange rate risk associated with other currencies or to diversify their fixed-income portfolio internationally.

Are Eurodollar CDs covered by FDIC insurance?

No, Eurodollar CDs are not covered by FDIC insurance because they are issued by non-U.S. banks and do not fall under the jurisdiction of U.S. financial regulators.

What risks are associated with Eurodollar CDs?

The primary risks include credit risk of the issuing bank, interest rate risk, and liquidity risk if the investor needs to sell the CD before maturity in a potentially less liquid secondary market.

How do Eurodollar CDs benefit issuing banks?

Issuing banks can attract U.S. dollar deposits and lower their funding costs, with the added benefit of using the dollars for international loans and investments.

  • LIBOR (London Interbank Offered Rate): The benchmark interest rate at which major global banks lend to one another in the international interbank market for short-term loans.
  • Offshore Banking: Banking activities conducted outside the country of residence of the depositor, typically in low-tax jurisdictions.
  • Time Deposit: A bank deposit that has a fixed term and typically offers higher interest rates compared to regular savings accounts.

Online Resources

  1. Investopedia - Eurodollars
  2. Federal Reserve Bank of New York - Eurodollars
  3. MarketWatch - Eurodollar Rates

Suggested Books

  1. Eurodollar Futures and Options by Burghardt, Galen.
  2. Inside the Eurodollar Market by Belton, Thomas J.
  3. The Financial Sector and Economic Development: The European Approach by Barrowclough, Diana E., and Mikhaylyukova, Nataliya V.

Fundamentals of Eurodollar Certificate of Deposit: Finance Basics Quiz

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