ACCA Financial Management (F9) Certification Practice Exam

What does the term Eurocurrency refer to?

1. A currency only used within its country of issue

2. A currency held outside its country of issue

3. A type of government bond

4. A method of currency exchange

The correct answer is: A currency held outside its country of issue

The term Eurocurrency refers to a currency that is held outside its country of issue. For example, if someone holds U.S. dollars in a bank account in Europe, those U.S. dollars are considered Eurocurrency. This concept is significant in the international financial system because it allows for the borrowing and lending of currencies outside of their domestic markets, facilitating global trade and investment. The nature of Eurocurrency markets provides opportunities for investors and borrowers to engage in cross-border transactions with lower regulatory constraints compared to domestic banking markets. This system enhances liquidity and gives institutions greater flexibility in managing currency risks and accessing funds. In contrast, a currency only used within its country of issue does not classify as Eurocurrency, nor does a type of government bond or a method of currency exchange. The focus of the Eurocurrency term specifically revolves around the international holding and use of currencies.