What it means
The concept is simply a dollar bank balance recorded outside the American regulatory perimeter. The underlying money still settles through the US payment system, but the deposit contract itself is with a bank branch abroad, so US reserve requirements and deposit insurance do not apply to it.
For businesses the significance is pricing. Because offshore dollar deposits carry lower regulatory costs, banks have historically paid more to attract them and charged less to lend them, and the resulting rates became the benchmark for trillions of dollars of corporate loans, mortgages and derivatives.
Eurodollar deposits are wholesale time deposits: fixed amount, fixed term, fixed simple interest rate, no early withdrawal. Terms of one, three and six months dominate, and interest is calculated on a 360-day year, which is the standard convention in money markets.
There is also a derivatives side that many finance teams meet before they meet the deposits. Eurodollar futures, long one of the most heavily traded interest rate contracts, allowed companies and banks to fix future short-term dollar borrowing costs, and they were priced as 100 minus the expected rate.
The nuance is that the benchmark landscape has changed. The old interbank offered rates that grew out of this market have largely been replaced by rates based on actual overnight transactions, so a modern loan may still be offshore dollar funding while being priced against a newer benchmark.
The users are mostly institutions rather than individuals. Corporate treasurers with large idle balances, banks managing their own dollar funding, and central banks holding reserves are the typical participants, and minimum sizes keep smaller businesses out.
Their activity still reaches the wider economy, because the rates agreed between these players influence what an ordinary commercial borrower pays.
In practice
Real-world examples.
Example
A US technology company holds $800,000,000 of cash generated by overseas subsidiaries. Its treasury places tranches of it as eurodollar deposits with banks in London and Singapore, laddering the maturities across one, three and six months so cash comes back at regular intervals.
Example
A Korean shipping line borrows eurodollars to finance a vessel purchase because its charter income is in dollars. Borrowing offshore gives it access to a deeper pool of dollar lenders than its domestic banking market offers.
Example
A US bank finds its dollar deposits are short of what its lending book needs for the quarter. It raises the difference by taking eurodollar deposits through its London branch, which is faster than competing for retail deposits at home, and it repays the deposits as its loan book runs down over the following months.
Formula
Calculation
Interest on a eurodollar deposit = principal x annual rate x (days / 360).
A treasurer places $25,000,000 with the Singapore branch of an international bank for 30 days at 5.20%.
Day count fraction = 30 / 360 = 1 / 12.
Interest = $25,000,000 x 5.20% = $1,300,000 for a full year.
For 30 days: $1,300,000 / 12 = $108,333.33.
The bank repays $25,000,000 + $108,333.33 = $25,108,333.33. If the treasurer had accepted an onshore rate of 5.00% instead, the 30-day interest would be $25,000,000 x 5% / 12 = $104,166.67, so the offshore deposit earned $4,166.66 more.Case study
Seen in the real world.
What follows is an illustrative, fictional case. Pelham Logistics, an invented freight forwarding group, kept $45,000,000 of surplus cash in an onshore money market account paying 4.30%. A new treasurer calculated that three-month eurodollar deposits were being quoted at 4.70%, worth about $45,000 more over a quarter on that balance.
The board asked one question that changed the analysis: what happens if we need the cash early? Pelham had a habit of making opportunistic acquisitions of small regional depots, and a locked 90-day deposit would either be unavailable or would be broken at a penalty.
The compromise was a laddered structure. Pelham placed $15,000,000 for 30 days, $15,000,000 for 60 days and $15,000,000 for 90 days offshore, so a third of the balance matured every month. The group captured most of the yield advantage while ensuring cash became available regularly without breaking any deposit.
Watch out
Common mistakes.
- Thinking eurodollars are a separate currency or a stablecoin-like instrument. They are ordinary US dollars, distinguished only by where the deposit is booked.
- Assuming the deposit must be in Europe. Offshore dollar deposits in Asia and the Caribbean are still called eurodollars.
- Comparing an offshore quote with an onshore quote without adjusting for the day count. Money market rates on a 360-day basis are not directly comparable with rates quoted on a 365-day basis.
Questions
People also ask.
Are eurodollar deposits insured?
No, they sit outside US deposit insurance, so the depositor is exposed to the bank and to the host country's insolvency rules.
Why did eurodollar futures matter so much?
They let banks and companies fix a future short-term dollar interest rate cheaply, which made them a central hedging tool for decades before newer benchmarks took over.
Can a company hold eurodollars and still report in dollars?
Yes, there is no currency translation involved, because the deposit is denominated in dollars from start to finish.
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