Euro-commercial paper is a short term loan issued in the international money market. The loan is issued either by a bank or a corporation, which is an unsecured loan. Euro-commercial paper is denominated in a currency that is different than the corporation’s domestic currency. Euro-commercial paper or ECP is centered in London and is used to obtained quick or same day funds to be used in a different country. It provides flexible short term finance with credit lines through banks, usually with the prime rate set at a small margin above money market securities of comparable maturities. ECP has a maturity date from one day up to three hundred and sixty days, depending on the loan. For example, if a company that is based in the US issues a short term bond that has been denominated in Swiss franc to finance its goods in the international money market, then they have just issued a euro-commercial paper. There are some differences between commercial paper and ECP, for one ECP has twice the maturity life as CP. Another is ECP is trade in the secondary market and while CP is held till it matures. Since 2004 ECP has grown rapidly, since being formed in1985 it was reached 360 billion in May 2004. But the major advantage of ECP is its flexibility. ECP is multidenominational, which means it allows borrowers to select a wide range of currency. Historically, ECP was denominated in dollars but now non-dollar currency account for more than two thirds issued. Now having multicurrency ECP this allows opportunity for swap arbitrage, which means combining CP and with cross-currency swap. By swapping currencies this helps manage both interest rates and exchange rate risk. Swapping future cash-flows obligations, the counterparties are able to replace one cash-flow currency with another cash-flow currency that is more desirable to that firm or individual. Since cross-currency swap started about forty percent of all ECP are now being swapped.

Sources

"euro-commercial paper." A Dictionary of Business and Management. 2006. Encyclopedia.com. 24 Oct. 2009 <http://www.encyclopedia.com>.

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