Nobody downloaded yet

International Financial Management - Essay Example

Comments (0) Cite this document
INTERNATIONAL FINANCIAL MANAGEMENT- INTEREST RATE SWAPS Name: Instructor: Institution: Course: Date: International Financial Management- Interest Rate Swaps Introduction Interest rate swaps are a financial instrument that firms use to hedge themselves against interest rate exposures by exchanging interest rate obligations with each other (Smith, 2011)…
Download full paperFile format: .doc, available for editing
GRAB THE BEST PAPER95.4% of users find it useful
International Financial Management
Read TextPreview

Extract of sample "International Financial Management"

Download file to see previous pages Interest rate swaps are especially useful where on one hand, a firm wants to receive/make payment in the form of a variable interest rate and on the other hand another firm which prefers instead to receive/make payment in the form of fixed interest rate so as to limit its future risk. The first swap was executed over thirty years ago (Corb, 2012). The rationale behind such a derivative instrument is that, both parties to the financial arrangement have their own distinct priorities and requirements such that in swapping, there is a mutual benefit to be derived. This benefit arises from three major elements of the capital market: The comparative advantage, information asymmetries and fixed rate debt vis-a-vis the embedded options (Flavell, 2010). In essence, the monetary gain one party makes through the swap contract is equal to the monetary loss of the counterparty to the contract. This is to say that although there is the overall benefit of a minimized risk arising from uncertainties within the financial market, one party to the contract will incur some monetary loss. ...
The most common forms of interest rate swaps include: Fixed for floating interest rate swap Floating for fixed interest swaps Same currency swaps Different currency swaps Discussion For firms such as ABC limited, a variable for fixed interest rate swap is very desirable. Firstly, with regard to synthetic fixed rate financing (also referred to as signaling). The asymmetric nature of the information environment means that firms themselves possess a better view of their levels of credit risks. As such, they require a credible way(s) of transmitting such information to the investors within the market. The firm’s borrowing of a short term debt instrument and swapping it for a fixed debt instrument signals good levels of credit of the firm to the market (Flavell, 2010). A firm is only able to do this in light of its improving future prospects. Any subsequent floating/variable debt instruments sought after will be at better and better rates (since the market can in itself recognize this) provided that the market is sure that the firm’s projected level of credit is sound. Ordinarily, the market reacts harshly to any false signaling by firms about their credit levels. The market conducts a comparison of the firm’s signal now and its performance in the subsequent period; where the firm’s credit has not risen, the market assumes that the signaling was false and retrospectively the market may downgrade the firm’s credit rating by more than usual. Secondly, the underlying principal is not exchanged or swapped. This means that the maximum loss is substantially minimized to the net payments to the counterparties of the swap contract. Additionally, where the interest rate on floating debt ...Download file to see next pagesRead More
Cite this document
  • APA
  • MLA
(“International Financial Management Essay Example | Topics and Well Written Essays - 2500 words”, n.d.)
Retrieved from
(International Financial Management Essay Example | Topics and Well Written Essays - 2500 Words)
“International Financial Management Essay Example | Topics and Well Written Essays - 2500 Words”, n.d.
  • Cited: 0 times
Comments (0)
Click to create a comment or rate a document

CHECK THESE SAMPLES OF International Financial Management

International Financial Management

...?Contents Executive Summary 2 International Financial Management – An overview 3 International Financial Markets 4 Foreign Currency Risks and Types 5Exposure to Foreign Exchange Rate Risk 6 Exposure to Interest Rate Risk 8 Foreign Direct Investment and its Management 9 Multinational Capital Budgeting 11 References 12 Executive Summary Multinationals are now focusing more and more towards practicing prudent international financial management. Communication and advancement in technology has bridged the distances and companies are indulging in international trade through...
12 Pages(3000 words)Essay

International financial management

...?International Financial Management s Section-A Ans d). the rate given is the rate for dealing directly with afinancial institution Ans-2) 1.7475 * (1+0.99%) = 1.7575 – 82 (c). 1.7575 - 82 Ans-3) (d). the Interest Rate Parity Theory Ans-4) Bid rate at Intercontnental Bank = 1.6685 Bid Rate at MegaBank = 1.6585 Ask Rate Intercontenantal Bank = 1.6695 Ask Rate MegaBank = 1.6595 If one buys from the Mega Bank, then he will get this price 1.6595 And sell on the rate of 1.6685, and then arbitrage profit of 5,432 could be gain accordingly (b). USD 5,423 Ans-5) = 1.800 – 1.7800 = 0.02 = 0.02 * 90/365 = 4.4% on discount Ans-6) (d). Translation Risk can be avoided by matching the currency of an...
4 Pages(1000 words)Essay

International Financial Management

...? [INTERNATIONAL FINANCIAL MANAGEMENT] Introduction NeptunePlc is considering setting up manufacturing plants for water pumps in both the United States and South Africa, with a sole aim of profit maximization. This report analyses the possible effects that would accrue if the United States takes action to reduce its current account deficit, given that currently, all water pumps are manufactured in Europe. It also analyses the effects of devaluation of the Dollar. Pertaining to planned investments in South Africa by Neptune, this report outlines the possible threats of local firms’ resistance and how Neptune might respond to them. Finally, the report outlines the effects of currency...
10 Pages(2500 words)Assignment

International Financial Management

...International Financial Management JMC Plc: Report on Country Risk Analysis for Egypt in respect of the Proposed Investments 0 Introduction: In the present day business environment investments in third countries is an important step for the success of any business venture. By enabling the firm to take advantage of the economies of scale as well as operating in a wider market the investments in prospective third countries help the firm enhance its profitability and growth potential. However such investments turn out to be a complex issue for the management to consider several risk factors before deciding on the investment. Especially when the investment is of large capital nature, there are several risks associated with the social... to a...
12 Pages(3000 words)Essay


...Management Structure Shell is a truly global company with presence in many countries and an organizational set up which is truly global in nature. The top management of the firm has historically been dominated by the Dutch or British executives however, since 2005; both the Chairmanship as well as the CEO of the firm is both non-Britain as well as non-Dutch. It is also important to note that the Shell has the regional presence wherein regional centers are mostly controlled by the local as well as international representatives of Shell appointed as country managers. As such what is also critical to note that management structure of the firm is largely...
2 Pages(500 words)Case Study

International Financial Management

...International Financial Management: Purchasing Power Parity International Financial Management: Purchasing Power Parity Purchasing Power Parity (PPP)theory believes that similar products and services in different countries might cost same in the long run. This is because of the fact that the exchange rates of buying a product or service in country will be adjusted another country in order to eliminate the arbitrage or the attempt to profit by exploiting price differences of identical or similar financial instruments, on different markets (Purchasing power parity, n. d). For example, consider a mobile phone which costs...
3 Pages(750 words)Assignment

International Financial Management

...International Financial Management International Financial Management Managing Dollar Exchange Rate Firms exposed to foreign currency exchange should adopt exchange rate risk as an integral part of their decisions. Foreign currency exchange risk facing a firm is the exposure to probable financial losses because of foreign currency devaluation against the domestic currency (Madura, 2009). Thus, a firm involved in international transactions should adopt exchange rate measures to mitigate the financial losses that are likely to arise if the foreign exchange rates between the cross-border country currency and home currency fluctuates. SN is likely to experience the foreign exchange risk due to it cross-border transactions. Fluctuation... of the...
10 Pages(2500 words)Assignment

International Financial Management

...International Financial Management Introduction When an organisation does business across international borders, it has to face the risk of currency exchange rates changes (Brigham, 2007). These risks come in various ways. First, there are transaction risks, which occur when the firm’s financial portfolio is reduced due to unfavorable changes in the values of the currencies. When a firm transacts using one currency and gets paid using another, there is always a risk of losing money and making prefects. For instance, when a firm buys stock in dollars and sells the same in pounds, it incurs the risk of losing money if the pound loses its value against the dollar. Sometimes, firms sell their products before they have met the cost... exchange...
10 Pages(2500 words)Book Report/Review

International Financial management

... of Introduction The first part of this paper seeks to advice Medco Ltd, a pharmaceutical company based in UK, in choosing which of two methods of managing risks is most financially advantageous given its transaction to receive a foreign currency from another country. The second part will provide an evaluation of international risks that company faces in relation to foreign exchange rates and discussion of the appropriate methods of managing those risks 2.1. Advising Medco, Ltd , which option is more advantageous between two options. Based on computations made, option under method 1, -- to borrow 500,000 euros now is better. The following are given: If the company borrows euros now, the amount... of the...
8 Pages(2000 words)Essay

International Financial Management

...full International Financial Management 12 May Currency Fluctuations and Economic Exposure A company can take protective measures against currency fluctuations or changes in currency exchange rates by hedging using futures contracts. These are advance contracts to buy or sell a particular asset class which in this case is currency. Hedging simply involves the process of taking one risk in exchange for another offsetting risk. In the case of Colorado, Inc. it can enter into a futures contract where it will buy American dollars at a predetermined rate at a predetermined date sometime in the future. In this case, Colorado, Inc. is said to take the long position in dollars; alternatively, it...
1 Pages(250 words)Assignment
sponsored ads
We use cookies to create the best experience for you. Keep on browsing if you are OK with that, or find out how to manage cookies.

Let us find you another Essay on topic International Financial Management for FREE!

Contact Us