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

Use npv method to show your calculations, Xcell engineering is planning to ...

Xcell engineering is planning to construct a futsal stadium which has 5 courts to be rented out at any point of time. Its initial cost of investment is RM$280,000. It is expected t

Clearly explain speculation, QUESTION 1 Assuming perfect capital mobili...

QUESTION 1 Assuming perfect capital mobility under Mundell-Fleming Model, clearly explain the effectiveness of- i) an expansionary fiscal policy under a fixed exchange rate

Baumol, To what extent does empirical evidence on corporate objectives supp...

To what extent does empirical evidence on corporate objectives support the predictions of Baumol’s “Sales Maximisation Hypothesis?”

Total return for a mortgage-backed and asset-backed security, The ...

The total return in case of mortgage-backed and asset-backed securities depend on the projected principal repayment and the interest earned on r

Determination of spread, Determination of spread Daily interest rate = ...

Determination of spread Daily interest rate = 5.11/ 365 = 0.014% per day Variance of cash flows = 1000 × 1000 = $1000000 per day Transaction cost = $18 per transaction

Parity conditions, Parity Conditions A parity condition defines the rel...

Parity Conditions A parity condition defines the relative value of one country's currency to the other country's currency. The condition states how, for the example, difference

Explain how earnings available to common stockholders, Explain how earnings...

Explain how earnings available to common stockholders and common stock dividends paid from the current income statement affect the balance sheet item retained earnings. The cha

Cash flow duration, Cash flow duration, like effective duration, cons...

Cash flow duration, like effective duration, considers the change in the cash flow due to prepayment with the change in the interest rate. In effective duration,

Employees’ provident fund, Employees' Provident Fund (EPF) The Employee...

Employees' Provident Fund (EPF) The Employees' Provident Fund (EPF) Act, 1952 is the earliest legislation related to old age income security in India. It is a contributory prov

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