In economics, a financial market refers to a media that allows people to buy, sell, create and exchange financial securities such as share and bonds, commodities such as basic agricultural goods and precious metals, and other fungible items of value at low transaction costs and at prices that reflect the efficient-market. Both general markets where many commodities are traded and specialized markets where only one commodity is traded exist in financial market. Markets work by placing many interested buyers and sellers in one media, thus making it easier for them to find each other. The financial markets can be divided into different types such as capital markets, commodity markets, money markets, insurance market and foreign exchange market. A saver refers to the one who deposit their money in bank, invest in company share and pays premium to an insurance company with objective to earn interest, dividend and profit. They aim Continue reading
International Business Finance
Sovereign Wealth Funds (SWFs) – Meaning, Types, Benefits and Risks
Sovereign Wealth Funds (SWFs), investment vehicles of Governments are increasingly seen in action through acquisition of either natural resources like oil and gas fields or equity holdings in MNCs. While the reasons for establishing a SWF may vary from commercial to strategic ones, SWFs’ influence on the countries and corporate is substantial. Since they mostly stay invested for a long-term they do not pose threat of pulling out in the short term and creating huge volatility in the financial markets. Since their investment corpus run to billions, by staying invested for a long time, they have a stabilizing effect on the capital market even during crashes and short term fluctuations. However, regulations and guidelines of the SWF also needs to be put in place in order to avoid it from exercising any soft control or strategic moves that may affect the sovereignty of the country allowing investments. Sovereign Wealth Funds 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, the Continue reading
The Role of Asset Securitization in Financial Crisis
The financial crisis showed its first signs in the first quarter of 2006 when the housing market turned. A number of subprime mortgages, that were designed with a high interest payment began to default. Many of the loans were highly risky and only possible due to the clever creation of products like “2/28” and “3/27” adjustable rate mortgages (ARMs). These loans offered a fixed rate for the first two or three years, and then adjustable rates for the remaining twenty- eight or twenty-seven years, respectively. After the first two or three years, the adjustment of rates would be substantial enough as to be unaffordable for the subprime borrowers; thus, the mortgages were designed to be refinanced. But for the most part, this would be possible for subprime borrowers only if the collateral on the loan had increased in value, otherwise, they would default. Because these mortgages were all originated around Continue reading
Concept of Double Taxation
Double taxation is a situation that affects mainly multinational corporations when business profits are taxed at both the corporate and personal levels. The corporation has to pay income tax at the corporate rate before any profits are to be paid to shareholders. Profits are distributed to shareholders through dividends are subject to income tax again at the individual rate according to tax regime of the country. This way corporate profit are counted as twice income taxes. The outcome of double taxation does not affect smaller corporations, which can distribute the earnings straight to shareholders without the intermediate step of paying dividends. On the other hand, many other smaller corporations are able to avoid double taxation by distributing earnings to their employee or shareholders as wages. There are two types of double taxation: economical and juridical (international). Double economical taxation is related to the taxation of two and more taxes from Continue reading
Concept of ‘Fear of Floating’
In the modern era, many countries claim to be running a floating exchange rate. However, many of these countries actively limit fluctuation in the external value of their national monies. This behaviour has been dubbed “fear of floating”, several reasons exist for it. Firstly, there is the ‘original sin’ problem. Many emerging economies are unable to borrow overseas in their domestic currency. This leads to an accumulation of foreign debt liabilities that are unhedged. If there is a sharp depreciation in these nations’ exchange rate, the domestic currency value of their external debt will be altered and thus their economies net worth will also change. Secondly, policymakers in emerging markets suffer from a chronic lack of credibility. The economies may therefore experience large and frequent shocks to exchange rate expectations or to interest rate risk premiums. To gain confidence and credibility, the authorities who set the interest rate will therefore Continue reading