Although a relatively recent invention, currency swaps have quickly become a vital and widely used financial instrument. Given the steady increase in globalization, understanding the potential benefits of using currency swaps is essential to any modern multinational business. Currency swapping works just as the name implies – different national currencies are swapped between two parties for an agreed amount of time. Investopeia.com defines a currency swap as “two notional principals [of different currencies] that are exchanged at the beginning and at the end of the agreement” (Cavallaro, 2011).
Typically, the reason to engage in a currency swap with another company is because a company may have a comparative advantage in getting a loan in one currency, typically their domestic currency, though they might desire the funds to be in a foreign currency. If they can find a counterpart who also has a comparative advantage in getting financing in their domestic currency, both companies can benefit though a currency swap.
To illustrate this, imagine that a well-know U.S. based corporation wants to expand its operations in Europe. Perhaps it will receive more attractive financing in the U.S. based on its reputation and contacts than in Europe; so the company can get a loan from a U.S. bank at a relatively low rate and then simply swap the dollars for Euros with a European company which needs USD and likewise has an advantage in financing options in its domestic currency (McCaffrey, 2007). Another reason a currency swap might be beneficial to a company is to hedge against currency fluctuations. Consider a U.S. firm that is seeking to hedge some of its euro exposure by borrowing in euros; by arranging a currency swap with a European com...
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...t of deregulation and integration of national capital markets and extreme interest rate and currency volatility…” (Shapiro, 2006, p. 312)
Figure 1 (Bank for International Settlements, 2007) (BANK FOR INTERNATIONAL SETTLEMENTS, 1999) (Bank for International Settlements, 2005)
Works Cited
Cavallaro, M. (2011, June 7). Hedging With Currency Swaps. Retrieved September 9, 2011, from Investopedia.com: http://www.investopedia.com/articles/forex/11/hedging-with-currency-swaps.asp#axzz1XRYSf5wt
McCaffrey, M. (2007, April 27). An Introduction To Swaps. Retrieved September 9, 2011, from Investopedia.com: http://www.investopedia.com/articles/optioninvestor/07/swaps.asp#axzz1XP2LnDyM
Shapiro, A. (2006). Multinational financial management (8th ed.). John Wiley & Sons.
Walmsle, J. (1992). Foreign Exchange and Money Markets Guide, The. New York: John Wiley & Sons, Inc.
The coins made in gold, silver and bronze were traded during Roman Empire and the shortage of coins created a barrier for money circulation. However with the establishment of paper money, a sophisticated banking, global clearing system and electronic money, the global financial system evolved with a worldwide framework of legal agreements. In the Global Financial market, foreign currencies issued by the world, countries are traded by the buyers and sellers using currency exchange rates. Now a day, it is very common practices of companies in one country to raise capital in a foreign country by listing their stocks on major foreign exchanges given the growth of equity markets are becoming more globalized (SNHU, 2015).
The cost for macroscopic scale is the reduction of market liquidity, thus have negative impact on economic recovery. What is more, the execution of Volcker Rule makes the American bank industry in a weak position compared to the international bank industry.
The deregulation of the financial market resulted in great economic loss rather than gain due to the fact that the market did not satisfy the conditions required for Smith’s ideal economy to work; for a free market economy, there must be a competitive market, perfect information, and extremely low if any transaction costs (Lecture 09-Capitalism). In reality, the market had an imbalanced competitive market due to the sheer magnitude of firms such as Goldman Sachs, false information circulated by the firms in order to trick clients into making dicey investments, and high transaction costs due to banks forcibly driving up prices (Taibbi 2010). Therefore, rather than an increase in efficiency, the economy experienced a sharp decline as a result of the corrupt, greedy enterprises of Goldman Sachs and other Wall Street
see, foreign exchange hedging was an area of key importance for AIFS given the level of currency
Harris, Larry (2003). Trading and Exchanges: Market Microstructure for Practitioners. Oxford University Press. p. 290.
Wang, Jing 2008, ‘Why Are Exchange Rates So Difficult To Predict’, Economic Letter, Vol. 3, no. 6.
Major banks are cutting back on some of their legally permitted operations, such as- market making, and that has led to liquidity issues in the bond markets. Proprietary trading could become unregulated if more banking activities continue moving towards the shadow banking system. This would essentially defeat one of the main purposes of Volcker Rule. [d] The third major unintended consequence has been the degree by which the Federal Reserve has become the main regulator of the finance industry. In order to discourage future bailouts similar to the ones during the financial crisis, the Dodd-Frank Act limited the Fed’s emergency powers. However the liquidity and capital standards now imposed by Fed has purportedly become one of the most important regulatory developments of the Dodd-Frank Act.
Goodhart, C. & Taylor, A., 2004. Procyclicality and volatility in the financial system: The implementation of Basel II and IAS 39, London: London School of Economics.
Eichengreen, Barry. Globalizing Capital: A History of the International Monetary System. Princeton, NJ: Princeton University Press, 1996.
The expanding global market has created both staggering wealth for some and the promise of it for others. Business is more competitive than ever before, and every business, financial or product-based, regardless of size or international presence is obligated to operate as efficiently as possible. A major factor in that efficient operation is to take advantage of every opportunity to maximize profits. Many multinational organizations have used derivatives for years in financial risk management activities. These same actions that can protect multinational organizations against interest rate futures and currency fluctuations can be used to create profits for those same organizations.
...asmina Bogicevic. 2013. Accounting Implication of Foreign Currency Transaction Translation and Hedging. Serbia. Economic Horizons.
Other types of exchange rate risks are translation risk and so-called hidden risk. The translation risk relates to cases where large multinational companies have subsidiaries in other countries. On the financial statement of the whole group, the company may have to translate the assets and liabilities from foreign accounts into the group statement. The translation will involve foreign exchange exposure. The term hidden risk evolves around the fact that all companies are subject to exchange rate risks, even if they don’t do business with companies using other currencies. A company that is buying supplies from a local manufacturer might be affected of fluctuating foreign exchange rates if the local manufacturer is doing business with overseas companies. If a manufacturer goes out of business, or experience heavy losses, it will affect all the companies it does business with. The co...
The forward Currency Exchange Market allows interested parties to trade forward contracts on currencies (Madura, 2006, p117). Forward contracts are an agreement between a firm and a commercial bank to exchange a specified amount of currency, at a specified exchange rate and on a specified date. Forward contracts are being used around the world to mitigate the risk of wildly fluctuating foreign exchange rates in day to day business transactions. Firms use the forward contracts when they know they will need a certain amount of foreign currency at a set date in the future, it allows them to lock in a future exchange rate (Wikipedia, 2006).
As we are moving to the end of the course, we want to present you with the Federal Reserve System (Fed), which is the central bank of the USA. We are going to explore the roles of Fed in regularizing the economy, its function, and also the tools used in doing that. We will learn how central banks regulate the banking system and how they manage money supply in economies. We will also be presented to the financial crises lessons we can be able to understand the importance of the regulatory system; and then, we answering questions such as:
The foreign exchange market is one of important mechanism in the international business because foreign exchange is an intermediary for all nations in term of the growth of the economy. There are many functions of foreign exchange market in the global economy. In the international business, it uses the foreign exchange markets in four ways. First, the pay...