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My question is: Why are interest spreads small? I understand the answer is A but please...

My question is: Why are interest spreads small? I understand the answer is A but please explain

7) Interest spreads in the eurocurrency market are small for many reasons EXCEPT:

A) Eurocurrency loans are secured loans.

B) Eurocurrency deposits and loans are made in amounts of $500,000 or more on an unsecured basis.

C) The eurocurrency is a wholesale market.

D) Borrowers are usually large corporations or government entities.

Answer: A

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Answer #1

Euro currency markets offer market outside the country where it is a legal tender. As such, these markets do not have deposit insurance in euro currency markets. This demands a higher interest rates on deposits. Interest rates on Euro currency loans are also lower than the domestic loans because of lower regulatory requirements and ease of conevrtibility between currencies. Thus higher interest rates on deposits and lower interest rates on loans translates into a smaller interest rate spreads.

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