The US financial market or dollar market is the largest and the most versatile financial system in the world. It has the broadest range of funding options to offer and some of the most sophisticated and innovative financial institutions. The importance of this market is further enhanced by the dominant role played by the US dollar as the vehicle currency in international transactions, though over the years this has declined somewhat. At the same time, it is not a market that is readily accessible to borrowers from developing countries like India except perhaps those with the highest ratings and sovereign guarantees. In some ways the US financial system is perhaps the freest system. Institutions enjoy complete operational freedom in terms of products and instruments offered, pricing, etc. In other ways, it is subject to a host of supervisory regulations both, from the Federal and State authorities. The core of thisContinue reading
International Business Finance
Difference Between Euro Note Market and Euro Commercial Paper Market
The Euromarkets are the single most important source of commercial loan funds for the developing countries. The development and operation of Eurocurrency markets have played a very significant role in the post war international financial system. Indeed the explosive growth in international banking and bank lending could not have come about but for the Eurocurrency markets. Simply stated, the term Eurocurrency refers to a currency deposited in a bank outside the home country of that currency. Therefore, Eurocurrencies and Eurocurrency markets are outside the regulatory framework of any monetary authority-the monetary authority of the place where the deposit is made is not concerned with non-residents depositing or borrowing foreign currencies, which does not affect the domestic money supply. It is also outside the control of the monetary authority of the home country of the currency concerned because the transaction takes place outside the country. Inter-Bank Markets Apart from customer transactions,Continue reading
Asset Swaps
Unlike interest rate swaps and basis rate swaps discussed earlier, in which cash flows of debt obligation were changed, asset swaps are used to change the characteristics of an asset. For example, an investor with a ten year fixed Japanese yen bond may decide to enter into a currency swap to change his investment income into US dollar. The investor may feel that the Japanese yen will lose its value against the US dollar and would like to change his income into US dollar. Assume the current five year swap rate for US$ versus Japanese Yen to be 6.45-6.50%. The coupon rate of the investor’s bond is 7.00% and the bond has five years remaining. The investor can exchange his 50 bps Japanese Yen payments at the spot market as an extra income above LIBOR or have the dealer manage that risk as well. At the maturity date, theContinue reading
Forex Operational Risk Management through Marketing Management
Operating risk in foreign exchange operations can be negotiated ably through marketing management strategies as well. These are: market selection, product strategy, pricing strategy and promotion strategy. Market Selection: Impact of exchange rate fluctuations on operating profit can be dealt through right mix of markets. Major strategic operations for an exporter are the markets in which to sell and the relative marketing support to devote to each market. Marketing management must take into account its economic risk and selectivity, adjust the marketing support, on a nation-by-nation basis, to maximize long-term profit. From the perspective of non-US companies, the strong U.S. dollar is a golden opportunity to gain market share at the expense of their U.S rivals. It is also necessary-to consider the issue of market segmentation within individual countries. A firm that sells differentiated products to more affluent customers may not be harmed as much by foreign currency devaluation. OnContinue reading
Managing Foreign Exchange Risk with Forex Market Hedge
A firm may be able to reduce or eliminate currency exposure by means of Forex market hedging. Important Forex market hedging tools used for managing Forex risk are : 1. Hedging Through Options Market: Buying a Call option in Forex can be used by an importer or borrower to hedge his payables against exchange rate fluctuations. This is done only if is felt that the foreign currency is in an appreciation mode. Buying a Put option can be used by an exporter or lender to hedge receivables. This is done only when the foreign currency is in a depreciating mode. Buying a Call. Illustration: It is now August. Suppose a US importer has to pay in November 62.5 million yen to a Japanese supplier. The current $/Yen = $0.007739. A December call option in yen is available at a strike of $0.0078, per yen. The premium is $ 0.000108/yen. TheContinue reading
Managing Foreign Exchange Risk with Money Market Hedge
Firms, which have access to international money markets for short-term borrowing as well as investment, can use the money market for hedging Forex transactions exposure. Important money market hedging tools used for managing Forex risk are : 1. Discounting Foreign Currency Denominated Bills Receivable: Discounting is used in cases where the export receivables are settled through bills of exchange. The system enables the recipient to receive cash prior to the settlement date itself. The discount represents the cost for the facility extended by the bank discounting the bill. It enables the exporter to guard himself from -losses arising out of an adverse change in-the foreign exchange rate. There are two options before the exporter while considering bill discounting. The first, is to get the bill discounted through a bank in the importer’s country. The foreign currency so obtained can be repatriated at the spot rate prevailing then. The second optionContinue reading