Swap market, Financial Management

Assignment Help:

Swap Market:

The fall of Bretton Wood system in early 1970s weakened of the pound. It was imperative to stop the downward slide of the pound. In order to control the flow of foreign exchange during 1970s the British Government imposed various types of restrictions. The British firms were not allowed to undertake large-scale investments or big projects outside the country without paying heavy prices. These restrictions eroded the competitiveness of the British firms in the overseas market. Therefore, these firms engineered a methodology by which they could raise funds and make overseas investments. These firms started taking loans in home currency and exchanged them with their counterparts abroad. For example, a firm willing to make investments in America would take loans in British pounds in UK and exchange it with a company in US which has taken a loan in US dollars. Thus genesis of the Swaps market emerged from these transactions.

The emergence of the swap market in the earlier period was not free from obstacles. The problem was of mounting paper work and accounting. The loans undertaken by the firms were two separate transactions, which caused inflationary figures in the balance sheet. The banks in evaluating such companies could not rate them higher because of the data reflected in the balance sheet. But introduction of the Currency swap, the first formal swap instrument, alleviated the problem. Thereafter the underlying principal was treated as an off-balance sheet item.

The swap market thus came into existence in the late seventies as the currency traders employed the technique of swaps to evade the British controls on the movement of foreign currency. The swap on currency was earlier in the form of back-to-back parallel loans. Parallel loans/back-to-back loans are currency agreements whereby a UK holding company will lend pounds to the US subsidiary in the UK and the US firm will lend dollars to the UK subsidiary in the US to avoid exchange control. But these transactions during the earlier period were not only expensive but also time consuming, because no structured environment/ market existed.

 


Related Discussions:- Swap market

Yield to call, Yield to call is the yield that would be realized on a...

Yield to call is the yield that would be realized on a callable bond assuming the issuer of the bond redeems it before maturity. A bond's call provision is detail

Explain the currency trading at a discount, What is meant by a currency tra...

What is meant by a currency trading at a discount or at a premium in the forward market? Answer:  The forward market includes contracting today for the future purchase or sale o

What is the advantages of IFRS 8, What is the advantages of IFRS 8 A...

What is the advantages of IFRS 8 Advantages Allows users to view internal management's approach and highlights what's important from management's point of view.

Explain zero coupon bonds, Explain Zero coupon bonds The bonds that are...

Explain Zero coupon bonds The bonds that are sold at a discount from face value and do not pay any coupon interest over their life are known as Zero coupon bonds. At maturity t

What is a treasury bill? how risky is it?, What is a Treasury bill? How ris...

What is a Treasury bill? How risky is it? Treasury bills are the short-term debt instruments issued by the U.S. Treasury that are sell at a discounted and pay face value at mat

Explain benefits of currency option contract as hedging tool, What are the ...

What are the advantages or benefits of a currency options contract as a hedging tool compared with the forward contract? Answer:  The major advantage of by using options contra

Types and causes of unemployment, Question 1: (a) Discuss the main limi...

Question 1: (a) Discuss the main limitations of using changes in national income as an index of economic welfare. (b) What are the alternatives measures and issues that sho

Discounted free cash flow model as valuation of commonequity, Explain the d...

Explain the difference between the discounted free cash flow model as it is applied to the valuation of common equity and as it is applied to the valuation of complete businesses.

Calculate the economic order quantity, Q. Calculate the Economic Order Quan...

Q. Calculate the Economic Order Quantity? Calculate the Economic Order Quantity from the following details: Annual Inventory Requirements = 4, 00,000 units Cost of placin

Illustrating a straddle, Options Traded on Legal and General August 14  200...

Options Traded on Legal and General August 14  2009 Share   Price         Exercise      Price    Calls       Puts                                 Sep        Dec        Mar

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd