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

Caselet, 1.How would you judge the potential profit of Bajaj Electronics on...

1.How would you judge the potential profit of Bajaj Electronics on the first year of sales to Booth Plastics and give your views to increase the profit? 2. Suggestion regarding C

Brigham, how do legal consideration affect a firms credit policy

how do legal consideration affect a firms credit policy

Operating cycle, discuss an operating cycle of vegetable growing in Uganda

discuss an operating cycle of vegetable growing in Uganda

Explain risk aversion, What is risk aversion? If common stockholders are ri...

What is risk aversion? If common stockholders are risk averse, how do you explain the fact that they often invest in very risky companies? Risk aversion is the trend to avoid add

Concept and measurement of the cost of capital, Concept and measurement of ...

Concept and measurement of the cost of capital The evaluation of the worth of a long-term project suggests a certain norm or standard against which benefits are to be judged. R

Just-in-time inventory management, Q. Just-in-time inventory management? ...

Q. Just-in-time inventory management? It considerably improves the short-term liquidity of the business with a maximum financing requirement of $138533 rather than $155640. The

Purchasing and discounting of bills, Purchasing and discounting of bills is...

Purchasing and discounting of bills is the most important, from in which a bank lends without any collateral security. Present day commerce is build upon credit. The seller draws a

Define earning per share -eps, Earning per share Earnings per share (E...

Earning per share Earnings per share (EPS) are computed as profit attributable to equity divided by the number of shares in issue and ranking for dividends. EPS therefore repr

Describe the general pattern of cash flows, Describe the general pattern of...

Describe the general pattern of cash flows from a bond with a positive coupon rate. Cash flows from a bond along with a positive coupon rate contain periodic interest payments an

#WALTOR''S MODEL., CAPITALISATION RATE=0.01 EARNINGS PER SHARE(E)=10 ASSUME...

CAPITALISATION RATE=0.01 EARNINGS PER SHARE(E)=10 ASSUME RATE OF RETURNS ON INVESTMENTS (R):15

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