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... ... middle of paper ... ...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 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
Harris, Larry (2003). Trading and Exchanges: Market Microstructure for Practitioners. Oxford University Press. p. 290.
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.
Cabral, R. (2013). A perspective on the symptoms and causes of the financial crisis. Journal of Banking & Finance, 37, 103-117
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).
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.
In accounting, foreign currency translation is an important part when measuring a foreign subsidiary’s financial statements. Foreign companies keep the accounting records in the local currencies. In order to present the financial statements in the same reporting currency as for the parent company, the domestic firm must translate the foreign subsidiary’s financial statements from the foreign currency to the domestic currency. This is known as foreign currency translation. Consolidating financial statements between foreign subsidiaries and the parent companies would not be possible, if there is no foreign currency translation.
Ritter, Lawrence R., Silber, William L., Udell, Gregory F. 2000, Money, banking, and Financial Markets, 10th edn, USA.
There may also be a credit risk associated with foreign exchange currency because a ‘buyer’ is essentially promising to purchase the currency on a future date. The buyer may not be able to complete the transaction simply because the funds are not available at the time. So, in cases where commercial bank does not know a company well, and to protect against the credit risk, they require some form of security (such as a mortgage be put forward or a deposit).
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:
Wang, Jing 2008, ‘Why Are Exchange Rates So Difficult To Predict’, Economic Letter, Vol. 3, no. 6.
There is one thing that differentiates the international business with the domestic business where it uses more than one currency in the commercial transaction. For example, if a company from British purchases some goods from a company from US, the international transaction will require for exchanging pounds and U.S. dollars which involve the foreign exchange market. In the foreign exchange market, any country that wish to do business with foreign country, the country need to convert their domestic currency into the foreign currency that they are wish to cooperate with through foreign exchange.