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

Capital raising, how can covered bond affect other secutites price

how can covered bond affect other secutites price

Calculate the break-even point, A Video Rental store has two employees. The...

A Video Rental store has two employees. The Supervisor is paid $2,200 per month. The other employee, Mark is paid $1,200 per month. In addition, Mark is paid a commission of 20 cen

Explain about routine functions, Q. Explain about Routine Functions? Ro...

Q. Explain about Routine Functions? Routine Functions: - The routine functions are Supervision of cash receipts and payments. Opening Bank Accounts as well as managing them Saf

Stakeholder vs shareholder approach, QUESTION 1 (a) What do you underst...

QUESTION 1 (a) What do you understand by the term Civil Society Organisations? (b) Distinguish between sectional and promotional groups. Give examples to support your answer

What are the factors of debt securities, What are the factors of debt secur...

What are the factors of debt securities A legal agreement, known as a trust deed, is drawn between security holders and company issuing the debt securities. Every security issu

Find the impact of price and trading volume, Purpose of research: The a...

Purpose of research: The aims of this research are to examine the effectiveness of speculation on efficiency of Petrochemical sector in Saudi Arabia financial market"TADAWUL".

Straight value (pure debt value), The straight value of a convertible...

The straight value of a convertible bond is nothing but the value of a non-convertible bond having same characteristics. For example, assume that a company has tw

Market mechanism, Market mechanism: Market mechanism is a term from ec...

Market mechanism: Market mechanism is a term from economics denoting to the use of money exchanged by sellers and buyers with an open and understood system of time and value t

Bid-ask quotes, As the cash manager of your company, you wish to buy $1,0...

As the cash manager of your company, you wish to buy $1,000,000 in 30-day Treasury bills. You obtain the following bid/ask quotes from three dealers:

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