Asset securitization is way of financing for lenders to obtain funds in the capital markets for the origination of consumer and business loans. It is different from the traditional way of financing, where lenders finance loan origination’s with deposits. Started in 1970, the asset securitization market had a remarkable history of growth and development. By 2000, it became the largest sector of the U.S fixed income securities market. In matured capital market, asset securitization has proven to be an efficient way of financing in that it reduces the ultimate funding cost for the borrower, improves the financial operation for the lender and provides diversified investment products for the investor. The Process of Asset Securitization In today’s world, asset securitization means a process by which one entity pools its interest in a series of identifiable future cash flows and then transfers the claims on those future cash flows to another entity Continue reading
International Finance
International finance is the branch of economics that studies the dynamics of foreign exchange,foreign direct investment and how these affect international trade. Also studies the international projects, international investment and the international capital flow .International Finance can be broadly defined, as the study of the financial decisions taken by a multinational corporation in the area of international business i.e. global corporate finance. International finance draws much of its background from the preliminary studies in the topics of corporate finance such as capital budgeting, portfolio theory and cost of capital but now viewed in the international dimension.
Offshore Banking
Origin of Offshore Banking The origin of offshore banking units can be traced to the growth of financial activity in tax havens. A “tax haven” is a place where non-residents can receive income or own assets without paying high taxes. Some such places are Bahamas, Bermuda, Hong Kong, the Netherlands, Panama and Switzerland. Some features of these tax havens are: Low rate or complete absence of income tax on foreign investment and income. High degree of economical and political stability and a political system, which directly or indirectly encourages and fosters business activity at the center. Strict and well enforced rules of banking secrecy. Absence of exchange control Availability of supporting infrastructure such as an efficient communications and transportation network. Presence of well developed legal system and professional accounting expertise. Investor’s confidence due to past credential. No incidence of violence or criminal activities. These features encourage various types of business Continue reading
Forex Operational Risk Management through Production Management
There are four production related strategies available to deal with foreign exchange operational risk. These are input-mix, plant location, relocation of production and cost cutting. Input-mix: Global sourcing is a great strategy to deal with operating risk. In a survey of 152 manufacturing companies world over, the Machinery and Allied Products Institute, a research firm, found that 77% of them had increased their global sourcing since the rise of the dollar, which rises dollar cost. This is as it should be. The principal effect of a real exchange rate change is to change the price of domestically produced goods relative to foreign goods. A well-managed firm should be searching constantly for ways to substitute between domestic and imported inputs, depending on the relative prices involved and the degree of substitution possible. Plant Location: A firm without foreign facilities exporting to a competitive market, whose currency has devalued against currency of Continue reading
Swaps Risk and Exposure
The great bulk of swap activity of date has concentrated on currencies and interest rates, yet these do not exhaust the swap concept’s applicability. As one moves out the yield curve, the primary interest rate swap market becomes dominated by securities transactions and in particular the Eurodollar bond market. The advent of the swap market has meant that the Eurodollar bond market now never closes due to interest rate levels: issuers who would not come to market because of high interest rates now do so to the extent that a swap is available. Indeed, the Eurodollar bond market owes much of its spectacular growth to the parallel growth of its swap market. The firms that now dominate lead management roles in the Eurodollar bond market all have substantial swap capabilities and this trend will continue. One extension is seen in the beginning of the market for equity swaps- an exchange Continue reading
History and Development of Currency Options and Futures
Options and Futures have been a feature of trade since ancient times. Futures and options have been around as long as there has been commerce, because commerce involves risk. In the last two decades or so, such risks have grown almost exponentially, and these volatile trading conditions have created substantial growth in the use of futures and options. In the global integration; the use of Futures and Options products has changed the financial world. Futures and Options are used to manage external business risks. It is therefore interesting to note that the phenomenal growth in their use coincided with the collapse of Bretton Woods fixed exchange rate regime and the suspension of the dollar’s convertibility into gold. Exchange rates suddenly became much more volatile and because interest rates affect and are effected by exchange rates, so interest rates also became much more volatile. A method of managing risk was required. Continue reading
Theories of Foreign Exchange
Every country has a currency different from others. There is no common medium of exchange. It is this feature that distinguishes international trade from domestic. Suppose the imports and exports of a country are equal, the demand for foreign currency and its supply conversely, the supply of home currency and the demand for it will be equal. The exchange will be at par. If the supply of foreign money is greater than the demand it will fall below par and the home currency will appreciate. On the other hand, when the home currency is in great supply, there will be more demand for the foreign currency. This will appreciate in value and rise above par. Economists have propounded the following theories in connection with determination of rate of exchange (Theories of Foreign Exchange). 1. Mint Par Theory Mint par indicates the parity of mints or coins. It means that Continue reading