sales of forward contracts through the purchase in the NewYorkmarket of similar contracts (and, as will be explained later in detail, not being permitted to cover them in the official forward market of the foreign country involved), U.S. banks were forced to buy spot exchange at the time the futures contracts were sold. Their foreign balances, therefore, showed very sudden and large increases over normal requirements. This was a profitable business for them owing to the interest earned on their deposits abroad and the premium over spot at which futures were quoted
Mr. Leonardo Bartolini, R. Spence Hilton, and Mr. Alessandro Prati
We use transaction-level data and detailed modeling of the high-frequency behavior of federal funds and Eurodollar yield spreads to provide evidence of strong integration between the federal funds and Eurodollar markets, the two core components of the dollar money market. Our results contrast with previous evidence of segmentation of these two markets, showing them to be well integrated even at high intra-day frequency. We document several patterns in the behavior of federal funds and Eurodollar spreads, including liquidity effects from trading volume to yield spreads volatility. Our analysis supports the view that targeting federal funds rates alone is sufficient to stabilize rates in the, much larger, dollar money market as a whole.
for nonresidents. This allowed banks in those countries to buy and sell dollars freely and to use them in the financing of international trade.
In the early 1960s, two major international dollar markets existed, one centered on New York, the other on London. At that time the volume of international transactions was larger in the NewYorkmarket, but it was already apparent that the London banks had a competitive advantage. To some extent, this reflected “natural” locational advantages, for example, time differences and closer proximity to some important customers