The shaping channels of the currency swap prices on the PLN market

The Interest Rate Parity Theorem: A Reinterpretation

The introduction of the Dodd-Frank Act and similar reforms across the world has changed the OTC markets. The new OTC market structure and new regulations were discussed in Chapter 9. As a result of these reforms, standardized cleared OTC contracts have been introduced. Today, cleared instruments are traded that have been derived from various OTC products, such as interest rate swaps, basis swaps, currency swaps, foreign exchange swaps, total return swaps, equity swaps, equity index swaps, debt and debt index swaps, credit default swaps, and other commodity swaps. Although the cleared contract market is still a relatively new market and there is trading of a limited variety of types of contracts, the cleared contract market is expected to introduce a larger variety of instruments and trade higher volumes.KeywordsCle ContractionTotal Return SwapsClean InstrumentsCredit Default SwapsForeign Exchange SwapThese keywords were added by machine and not by the authors. This process is experimental and the keywords may be updated as the learning algorithm improves.

PurposeThe purpose of this paper is to re-examine currency swaps as an effective hedging technique for individual asset performance in today’s global real estate market, by considering hypothetical prime office investments across six different cities and five currency pairs. The perspective of a risk-averse, high net worth, non-institutional, smaller-scale Swiss investor is paired with investors from five additional national markets.Design/methodology/approachThe study examines currency swaps in key office markets across three continents (Frankfurt, London, New York, Sydney, Warsaw and Zurich) and extends previous work on the topic by adopting both Monte Carlo (MC) and Latin Hypercube (LH) techniques to create stochastic samples for individual asset performance analyses. This is the first paper to apply LH sampling to currency swaps with underlying real estate assets, and the validity of this method is compared with that of MC. Four models are presented: the experience of the domestic investor (no exchange rate (ER) fluctuations); an unhedged direct foreign investment; hedging rental income and initial purchase price via a currency swap; and hedging rental income and anticipated terminal value.FindingsThe efficacy of a swap depends on the historical framework of the ERs. If the foreign currency depreciates against the domestic one, hedging the repatriated cash flow of a property investment proved superior to the unhedged strategy (EUR, GBP, PLN and USD to the CHF). An investor would benefit from exposure to an appreciating foreign currency (CHF to the EUR, GBP, PLN and USD), with an unhedged strategy clearly outperforming the currency swap as well as the domestic investor’s performance, while a historically sideways fluctuating ER (AUD to the CHF) also favours an unhedged approach. In all scenarios, unexpected economic or market shocks could cause negative consequences on the repatriated proceeds.Practical implicationsThis research is of interest to small-scale, non-institutional investors aiming to develop strategies for currency risk mitigation in international investments for individual assets; however, tax-optimising strategies and the implications on a larger portfolio have not been taken into account.Originality/valueThere is no recent academic work on the efficacy of currency swaps in today’s global office market, nor has the position of smaller-scale high net worth investors received much academic attention. This research revisits the discussion on their validity, providing contemporary insight into the performance of six markets using LH as an alternative and original sampling technique.

This report looks at the current state of foreign currency deposits (FCDs) in Korea and identifies determinants of the foreign currency deposits and the relationship between foreign currency deposit and exchange rate stability. Based on empirical analysis and surveys of experts, this paper proposes a scheme to activate foreign currency deposits. Korea's foreign currency deposits have increased significantly since the global financial crisis, thanks to the continuation of the current account surplus. At the end of 2010, FCDs were $24 billion, and as of the end of 2017, FCDs increased to $87 billion. Accordingly, the role of FCDs as a source of foreign currency funds for domestic banks has increased significantly. In 2010–18, when looking at changes in the composition of foreign currency liabilities of domestic banks, the share of foreign borrowing decreased from 40.7% to 24.8%, while the reliance on FCDs rose from 20.1% to 35.3%. However, as corporations’ share of FCDs account for about 80%, Korea's FCDs are highly volatile depending on the size of imports and exports, exchange rate fluctuations, etc. In fact, during March–April 2019, the size of FCDs decreased sharply due to an increase in the exchange rate. In order to identify the determining factors of Korea’s FCDs, a structural VAR (vector autoregressive) model was used. When analyzed for the entire period, FCDs were found to respond significantly to the exchange rate shock, but were not significantly affected by the current account shocks. However, the impact of the two variables on FCDs varied significantly before and after the global financial crisis. Before the global financial crisis, while the effect of currency shocks on FCDs was not statistically significant, the impact of the current account balance on FCDs was significant. However, since the global financial crisis, the effect of commercial accounts on FCDs has been greatly weakened, while exchange rates have played an important role as a variable affecting FCDs. In addition, the report found that increased FCDs have a positive effect on exchange rate stability, thus increasing the legitimacy of policy efforts to expand FCDs. Using panel data from 21 countries, the impact of foreign exchange reserves and foreign currency deposits on exchange rate stability was demonstrated. It was confirmed that an increase in foreign currency deposits in countries or periods where foreign exchange reserves are relatively low reduces exchange rate volatility. Based on empirical findings and interviews with commercial bank officials and experts, the report provides several suggestions on how to raise FCDs. In order for FCDs to function as a stable source of foreign currency liquidity, banks must be given incentives in their management and procurement of FCDs. First of all, the current system where sell and buy transactions in the swap market lead to a reduction in foreign currency liquidity coverage ratio (LCR) should be improved. We suggest measures such as regarding foreign currencies that will be returned to the bank within a few days after a sell and buy transaction as cash inflows when conducting 3-month stress test calculations. In regard to the foreign currency LCR and three-month stress test, it will be necessary to check whether regulatory effects are overlapping with existing measures such as the foreign exchange stability levy or regulations on foreign exchange derivatives position, etc. In terms of foreign currency funding, we propose an improvement of the return on foreign currency deposits and the strengthening of global money management services. Should the current account surplus flow be disrupted, it will be difficult for the authorities to pursue the expansion of foreign currency deposits. However, based on the understanding of the incentive structure of the FCDs stakeholders analyzed in this report, it is necessary to promote the expansion of FCDs in a way that increases the attractiveness of FCDs as a financial product.

With respect to currency market and these problems are closer to it such as foreign currency translation and effect on prices of capital assets, to estimate actually required return of capital assets, we should consider these variable to our models. Therefore the concept of the capital asset pricing model (CAPM) is extended to international investments. This subject is emphasized by management on the one hand and investors on the other hand. When looking at investments in an international setting, incorporate foreign exchange risks are introduced. Some of the international capital asset pricing models are limited to one factor and others are multifactor models with attention to foreign currency that impact of the portfolio. Globalization and expansion of investment activities in different markets led to introduce and developed an international capital asset pricing model. This model evaluates the performance of various components of the investment portfolio that they composed of a variety of unlike the currency basis. Furthermore, the model in various financial markets, aggregate and transforms their results based on a uniform currency basis in the interpretation of results, and it's generalized to other sectors. Finally, it can provide comprehensive perspectives for investors.

The present paper aims to analyze impacts of financial policy on the foreign currencies exchange rates. The study utilizes time series data analyses in order to reach better econometric model that may reflect the relationship between financial policy and foreign exchange rates in Sudan between years 1989-2010. The importance of the analysis is embodied on shedding light on fluctuating financial policies in the country that negatively affects the economic performance. The study hypothesized that there are positive correlations between the financial policy represented by the independent variables of governmental expenditure and taxation and the dependent variable of foreign currencies exchange rates. The results show that there are positive correlations between total taxation and foreign currencies exchange rates. Moreover, results show that there are positive correlations between governmental expenditures and currencies exchange rates. The results are in agreement with the economic theory as illustrated by Mohamed (2012). However, their implications clearly define that the current financial crisis in Sudan is self-inflicted by irrational and irresponsible governmental macroeconomic policies and uncontrolled expenditure. I strongly point here at the necessity of austerity measures, first applied to the GE before applying them to the general governmental services, e.g., health, education, water and electricity services. Raising taxation seems to have enhanced financial resources which were used for defense, security and other sovereignty expenditures. That did not help to keep effective foreign currencies exchange rates in leash. In fact GE and Taxation lost control and unleashed hyper pricing for foreign currencies market prices. The current economic course is without doubts leading uncouthly to domestic market dryness of hard currencies as they are currently not dealt with as tools of commodities exchange. They represent saving commodity and solid asset. The expected results are the minimization of imports. It is even encouraging under-voicing of exports by setting-aside part of their revenues and preventing them from re-entering the country. In conclusion, I clearly admonish that official macroeconomic decision-makers are either ignorant or on purpose lead the country into total bankruptcy. The only feasible recommendation is that country needs a comprehensive policy restructure, particularly in its economic decision-making and economic planning.

The article analyzes the foreign exchange market functioning under the influence of exchange rate fluctuations. The main factors determining the exchange rate in the existing conditions have been determined. All course-forming factors are divided into fundamental ones, which include the main economic indicators; technical conjunctural; extraordinary (unexpected) and non-economical. The formation of the forward currency operations market trends, in particular forward contracts, currency swaps, options and other financial instruments, was also investigated. The income trends of the current currency market from quotes of the most used currency pairs are briefly described.It was concluded that the most predictable indicator in the current currency operations market is the standardized exchange rate, determined on the basis of currency quotes of at least 6 commercial banks. When calculating the average arithmetic rate, the highest and lowest quotation rates are not taken into account.The future foreign exchange market trends depend on the choice of the monetary policy vector, which is based on a qualitative and quantitative assessment. Since the processes in the currency market have a fractal structure and cannot be predicted using classical methods, the provisions of the fractal statistics theory are used for this purpose.In particular, on the basis of existing quotations of the currency pair US dollar/Ukrainian hryvnia, the Hurst indicator, which reflects the level of anti-persistence of the national currency exchange rate dynamics, was calculated, and accordingly, its ability to change trends to the opposite in periods of high volatility and in the presence of factors that cause it. The volatility of the national currency rate and the level of anti-persistence of currency fluctuations depends on a number of measures in the field of currency regulation and currency and monetary policy. At the same time, any intervention of the state government in the exchange rate formation process causes a change in the trend. The results of the calculations can be used for operational and strategic planning of the business entities behavior on currency markets and measures aimed at countering the negative impact of exchange rate changes.

The tea sector plays an important role in the Kenyan economy mainly through employment, contribution to Gross Domestic Product (GDP) and foreign exchange earnings. However, the sector faces a number of risks including but not limited to production, technological, price and market risks, legal and personal risks. Price and exchange rate volatility is one of the main sources of risk in the agribusiness sector. This paper sought to determine if foreign income, exchange rate, relative prices, price and exchange rate volatility have effects on Kenya’s black tea export demand. The study used panel data from World Bank and Central Bank of Kenya statistical bulletins for the period 1997 to 2010. Price and exchange volatility cannot be observed directly and were thus computed using Moving Average Standard Deviation (MASD) method. Sixteen major importer countries of Kenya’s tea were considered in the study. Im Peseran and Shin (IPS) unit root tests were used for testing the variables for the presence of unit roots. The study employed dynamic heterogeneous panel techniques developed by Peseran and Shin using autoregressive distributed lag (ARDL) model in the error correction form. The empirical model was estimated using pooled mean group (PMG) estimator. The study found that growth in foreign income and changes in price and exchange rate volatility were significant in the long and short run. Proportional changes in relative prices and foreign exchange rate were insignificant in the long run and short run. Key words: Price volatility, exchange rate volatility, Kenya’s black tea exports, autoregressive distributed lag (ARDL) model, pooled mean group (PMG) estimation.

A foreign currency derivative is a financial derivative whose payoff depends on the foreign exchange rates of two (or more) currencies. These instruments are commonly used for hedging foreign exchange risk or for currency speculation and arbitrage. Specific foreign exchange derivatives include: foreign currency forward contracts, foreign currency futures, foreign currency swaps, currency options, and foreign exchange binary options. These instruments are called derivatives because their value is derived from an underlying asset, a foreign currency. The financial managers of MNCs purchase these financial derivatives in order to reduce the risk associated with cash flows denominated in foreign currency, hedging this exchange rate risk or to take positions in the expectation of profit, speculation, or arbitrage. Financial derivatives are powerful tools of hedging (redistributing) foreign exchange risk, but at the same time, they are very risky instruments for inexperienced financial managers. Lately, there were many cases in which financial managers generated enormous losses for their companies (mostly banks) and led them to bankruptcy. Of course, the rule is always moderation and prudence. If we want to go one step further, the rule is the maximization of the social welfare of a nation.

Almost every individual at some point in their lifetime faces some form of foreign exchange or currency risk. An individual going on holiday to a foreign country faces the risk that exchange rates may move against them if they wait to change the bulk of their money at their destination, or it may move against them if they do not. Financial institutions and corporate bodies face similar risks but on a much larger scale and over many different time horizons. For example, consider the case where a company wishes to make a one-off purchase of special equipment. The decision which must be taken is: Should the foreign currency be purchased today and held (on an interest bearing account) until it is required? Or should the currency be purchased on or close to the date that it is needed?KeywordsExchange RateInterest RateCash FlowForeign CurrencyForward RateThese keywords were added by machine and not by the authors. This process is experimental and the keywords may be updated as the learning algorithm improves.

Modeling the relationship between oil and USD exchange rates: Evidence from a regime-switching-quantile regression approach

In 2014 US investors were snapping up dollar-denominated floating rate debt issued by corporations in anticipation that the Federal Reserve would begin to increase interest rates. Avis Budget Group saw an opportunity to issue $250 million of floating rate debt but promptly engaged in an interest rate swap to fix its payments at a low long-term rate because it didn't want to bear the risk of rising short-term rates. In July 2015 Starbucks reported that it had entered into cross-currency swap contracts during the first and third quarters of fiscal 2015 to hedge the foreign currency transaction risk of certain yen-denominated intercompany loans with a total notional value of ¥86.5 billion, or approximately $698 million. This chapter examines interest rate and currency swaps, which are additional instruments for your risk management toolkit. We have previously discussed a number of ways of managing currency risks using derivative securities, including forward contracts in Chapter 3 and futures and options in Chapter 20. The maturities for these instruments are somewhat limited, whereas the maturities in the swap markets extend to 30 years or longer. We have also noted that exchange rate exposures can be thought of as arising from a general mismatch between assets and liabilities denominated in different currencies. We will see how interest rate swaps allow firms to change the nature of their liabilities for a given currency from fixed to floating interest rates or from floating to fixed interest rates. Currency swaps can be used to change the currency of denomination of a firm's liabilities. Changes such as these can be desirable as the nature of a firm's business changes. Swaps also allow firms to seek out low-cost financing without sacrificing their preferred type of debt. Section 21.1 introduces the basic ideas associated with swaps and discusses the impressive size of the swap market. Section 21.2 provides a detailed analysis of the cash flows of interest rate swaps, and Section 21.3 provides a detailed analysis of the cash flows of currency swaps. Introduction to Swaps Swaps are contractual agreements between two counterparties to exchange a sequence of cash flows. In the modern swap market, over-the-counter dealers at major banks quote bid–ask spreads at which they are willing to do either side of a swap.

In this chapter, I study, qualitatively, how the volume of foreign exchange transactions reacts to the imposition of a transactions tax. Here, I assume that most countries agree to implement a tax on foreign exchange operations but that the coverage may or may not be com prehensive.1 First, I consider the situation that will arise if a country with a large financial centre does not impose the tax. Then, I analyse the situation in which only countries with smaller financial centres do not impose the tax, and there is no enforcement mechanism that penalizes them for not cooperating. Finally, I consider a situation in which all countries uniformly accept the tax and the tax can be readily imposed on those transactions that are conventionally considered foreign exchange operations-spot, futures and forward foreign exchange trades, and “plain vanilla” currency swaps and options-but not read ily imposed on those transactions that are not traditionally considered foreign exchange. Because activity will move from the taxed set of transactions to the untaxed, I consider a range of products that may serve as untaxed substitutes.

The global foreign exchange market, with a turnover of over $1 trillion daily, is the world's largest and most liquid financial market. It has certain inefficiencies, however, being actually a two‐tier market ‐ a competitive interbank market and a publicly quoted captive market of end users. Creating a foreign currency exchange (EXE), to serve the foreign currency market as national bourses serve securities markets, could abolish these inefficiencies. It could promote order, transparency and increased competition, lower transaction costs, and be justified by the fact that transnational activities such as foreign exchange trading use the global commons and depend on global governance. From user fees lower than the premiums consumers now pay when changing currencies with banks ‐ at present their only recourse ‐ FXE could realize vast revenues, which could be used for peacekeeping, development and other functions of the international public sector.

Systemic liquidity risk is the risk that an adverse event will result in simultaneous liquidity problems in a substantial portion of the financial system. The paper describes several aspects of this risk in the Polish banking environment: decreasing share of liquid assets in the balance sheet, growing maturity mismatch, risks related to foreign currency denominated loans financed through zloty deposits accompanied by FX and currency swaps or through external liabilities. Dependence on currency derivatives and foreign financing contributed to increased liquidity tensions in the financial crisis, including relative increase in customer deposit interest rates. The paper also presents the scale of liquidity support granted during the crisis by the central bank to banks operating in Poland.