Eurodollar Certificate of Deposit

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

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.
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.
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

Suggested Books

Eurodollar Futures and Options by Burghardt, Galen.
Inside the Eurodollar Market by Belton, Thomas J.
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

### What is a Eurodollar Certificate of Deposit (Eurodollar CD)? - [ ] A CD issued by U.S. banks and denominated in U.S. dollars. - [x] A CD issued by banks outside the U.S. and denominated in U.S. dollars. - [ ] A CD issued by European banks and denominated in euros. - [ ] None of the above. > **Explanation:** A Eurodollar CD is specifically a time deposit issued by banks outside the United States, predominantly in Europe, and it is denominated in U.S. dollars. ### What is the typical minimum denomination of a Eurodollar CD? - [ ] $10,000 - [ ] $50,000 - [x] $100,000 - [ ] $1,000,000 > **Explanation:** Eurodollar CDs usually have minimum denominations of $100,000, making them suitable for large-scale institutional investors. ### What is the usual maturity period for a Eurodollar CD? - [ ] Less than one year - [x] Less than two years - [ ] Two to five years - [ ] More than five years > **Explanation:** Eurodollar CDs generally have short-term maturities, typically less than two years. ### Why might investors choose Eurodollar CDs over domestic U.S. CDs? - [x] To earn interest on U.S. dollars without the exchange rate risk. - [ ] To benefit from FDIC insurance. - [ ] To avoid the U.S. banking system. - [ ] To earn interest in euros. > **Explanation:** Investors might choose Eurodollar CDs to earn interest on U.S. dollar deposits without the risk of currency fluctuations, as both the principal and interest are paid in U.S. dollars. ### Are Eurodollar CDs covered by FDIC insurance? - [x] No - [ ] Yes, if issued by an American bank. - [ ] Yes, for deposits under $250,000. - [ ] Only for personal accounts, not business accounts. > **Explanation:** Eurodollar CDs are not covered by FDIC insurance since they are issued by banks outside the jurisdiction of U.S. regulators. ### What is one of the primary risks associated with Eurodollar CDs? - [ ] Inflation risk - [x] Credit risk of the issuing bank - [ ] Exchange rate risk - [ ] Regulatory risk > **Explanation:** One of the primary risks of Eurodollar CDs is the credit risk associated with the bank that issues the deposit, since it may not fall under the same regulatory standards as U.S. banks. ### What is LIBOR primarily used for in the context of Eurodollar CDs? - [ ] Determining insurance premiums. - [ ] Setting legal regulations. - [x] As a benchmark interest rate. - [ ] Predicting inflation rates. > **Explanation:** LIBOR is commonly used as a benchmark interest rate to determine the interest rates on various financial instruments, including Eurodollar CDs. ### What sort of investors are mainly attracted to Eurodollar CDs? - [x] Institutional investors - [ ] Individual savers - [ ] Small businesses - [ ] Government bodies > **Explanation:** Due to their high minimum denominations and the scales involved, Eurodollar CDs are mainly attractive to institutional investors like multinational corporations, pension funds, and banks. ### How do Eurodollar CDs benefit the issuing banks? - [x] By attracting U.S. dollar deposits. - [ ] By lowering interest rates on domestic loans. - [ ] By insuring dollar deposits. - [ ] By converting funds to euros. > **Explanation:** Issuing Eurodollar CDs helps banks outside the U.S. attract deposits in U.S. dollars, which can be used for international loans and investments, thus diversifying their funding sources. ### What type of market involves trading Eurodollar CDs? - [x] Offshore banking market - [ ] Domestic direct investment market - [ ] Cryptocurrency market - [ ] Real estate market > **Explanation:** Eurodollar CDs are part of the offshore banking market, where banks outside the U.S. issue financial instruments denominated in U.S. dollars.

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