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

Importance of mutual funds in the investment intermediaries, Define the imp...

Define the importance of mutual funds in the investment intermediaries. Mutual funds: Mutual funds pool resources by several companies and individuals and invest these re

Calculate the acid test ratio, FIXED ASSETS                          200 00...

FIXED ASSETS                          200 000                       LONG TERM LIABILITIES CURRENT ASSETS CASH             40 000                       LOAN

Cost of sales and functioning costs, Entity A is significantly smaller than...

Entity A is significantly smaller than B in terms of revenue and would not impact LOP's revenue to the same extent. However A earns a noticeably better gross profit margin at 26% a

Bond Valuation, The Pennington Corporation issued a new series of bonds on ...

The Pennington Corporation issued a new series of bonds on January 1, 1979. The bonds were sold at par ($1,000), have a 12 percent coupon, and mature in 30 years, on December 31,

Explain the benefits of benchmarking, Explain the Benefits of benchmarking ...

Explain the Benefits of benchmarking - Better understanding of business, competition and customers. - Improves business performance and discourages complacency. - Good wa

Hedging strategy, Crown Co. is expecting to receive 100,000 British pounds ...

Crown Co. is expecting to receive 100,000 British pounds in one year. Crown expects the spot rate of British pound to be $1.49 in a year, so it decides to avoid exchange rate risk

Defqa, Ask question #Minimum 100 words acceptedaqs #

Ask question #Minimum 100 words acceptedaqs #

Describe the meaning of financial management, Q. Describe the Meaning of Fi...

Q. Describe the Meaning of Financial Management? Meaning of Financial Management: - Financial management is a vital as well as an integral part of business management. It demot

Extendible reset bonds, Extendible reset bonds are floaters in which ...

Extendible reset bonds are floaters in which the issuer is required to reset the coupon rate so that the issue will trade at a predetermined price (usually above

Valuing debt securities, Valuing Debt Securities Securities which promi...

Valuing Debt Securities Securities which promise to pay its investors a stated rate of interest and return principal amount at the maturity date are known as debt securities.

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