Currency Swaps Research Articles

Comments by Anwar Nasution, on The Economics of RMB Internationalization

Anwar Nasution: It is my pleasure to comment on this excellent paper on the important topic of analyzing the People’s Republic of China’s (PRC) reforms over the past decade to move toward internationalizing the Renminbi (RMB). The RMB is beginning to be used as an international medium of exchange in dominating and setting cross-border trade and financial transactions. The paper summarizes the benefits and costs of RMB internationalization from a theoretical point of view. There are also econometric studies on the impacts of RMB internationalization on financial development in the PRC and the estimate of seigniorage revenue of RMB, but there is no estimate on the inflationary tax enjoyed by the PRC from foreign holdings of its currency. In addition, internationalization of the RMB allows the PRC to borrow from the international community with liabilities denominated in that currency without exchange rate risk. Unfortunately, there are no brief summaries of PRC government policies on how to make the RMB become an international unit of account, medium of exchange, and store of value. Also there is no information provided in the paper on the size of capital markets in the PRC: the structural financial system, the size of public sector debt and security market, and their liquidity.

China's Bilateral Currency Swap Lines

We study the determinants of China’s bilateral local currency swap lines that were established since the recent global finance crisis. It is found that economic factors, political considerations, and institutional characteristics including trade intensity, economic size, strategic partnership, free trade agreement, corruption, and stability affect the decision of signing a swap line agreement. Once a swap line agreement decision is made, the size of the swap line is then mainly affected by trade intensity, economic size, and the presence of a free trade agreement. The results are quite robust with respect to the choices of the Heckman two-stage framework or the proportional hazard model. The gravity effect captured by distances between China and its counterparts, if present, is mainly observed during the early part of the sample period under consideration.

Regional Financial Arrangement in East Asia: Policy Proposal for Strengthening the Chiang Mai Initiative Multilateralization

Since the Asian financial crisis of 1997-98, the East Asian countries have made efforts to guard against the crisis not only by being self-insured through the accumulation of foreign reserves but also by establishing a bilateral or regional financial safety net through the pooling of reserves. Holding ample amount of foreign reserves has proven itself to be useful but it comes with a high price tag. Moreover, in spite of noticeable achievements in recent years, the regional financial arrangement, namely the CMIM framework, had not been activated during the global financial crisis in 2007-08. Ironically, the bilateral currency swaps with the US Federal Reserve Bank played a pivotal role at that time in addressing some Asian countries’ liquidity shortages.The crisis in 2007-08 has provoked a recurring discussion about the necessity of transforming the international monetary system and enhancing the alternative or complementary insurance mechanism of regional financial arrangements to fend off shocks. In the paper, we propose two ways to strengthen a regional financial arrangement in East Asia to make a practical contribution to the global architecture reform agenda and to build a resilient economy: (i) establishing a currency arrangement under CMIM framework to increase the usage of local currencies; and (ii) creating a cooperative framework between the AMRO and the IMF in the area of surveillance.

Islamic Cross Currency Swap (ICCS): hedging against currency fluctuations

Subject area The case is suitable for use in the topics related to the functions and roles of hedging and the Islamic derivatives/hedging instruments. Study level/applicability The case is designed for undergraduate students, taking courses in Islamic Banking, Islamic Finance and Risk Management for Islamic Banking Institutions. Case overview This case describes the theory and application of Islamic Cross Currency Swap (ICCS) in the market. Having this understanding enables case analysts to understand the functions and roles of hedging and the Islamic derivatives or hedging instruments of ICCS comprehensively. The case begins with Yusof, the new finance officer of Al-Yemeni Sdn. Bhd to analyse the permissibility of hedging and derivatives to hedge against currency fluctuations from Islamic perspective. Yusof had to complete the report before the Board of Director's quarterly meeting, which was within a week. Having in mind that the company's mission was to be a Shariah-compliant stock by 2012, Yusof was responsible for ensuring that the company was administrated in an Islamic way. Besides, he also had to ensure that the company generated income and profit as planned. In doing so, he had to strategise all possible risk exposures that could be mitigated or hedged. This case ends by giving the case analyst information on ICCS offered by Al-Rizky Bank Berhad (ARBB). In this case, Yusof had to find out whether hedging is allowed in Islam. What are the Islamic derivatives? What are the different views of Shariah scholars on various types of derivatives? What is the modus operandi of ICCS? Is the ICCS offered by ARBB Shariah compliant? What are the possible risk exposures being hedged in ICCS? Expected learning outcomes To provide exposure on the concepts of hedging from Islamic perspectives; to provide exposure on the concepts of Islamic derivatives/Islamic hedging instruments; to stimulate understanding on the modus operandi of ICCS in ARBB; and to help case analysts understand what makes the Islamic hedging instruments become Shariah compliant. Supplementary materials Teaching notes are available for educators only. Please contact your library to gain login details or email support@emeraldinsight.com to request teaching notes.

ANALISIS PENGELOLAAN VALUTA ASING TERHADAP PROFITABILITAS PT GARUDA INDONESIA (PERSERO) TBK

In 2013 the company also invested large amounts in the form of additional fleets to support operational improvements financed with foreign currency debt. For the use of these debts, the company must pay the credit debt periodically. The decline in the rupiah against the US dollar led to a growing number of rupiah funds should be spent. This study aims to determine how the management of foreign exchange through the method of hedging against the profitability of the main indicators of profit or loss on foreign exchange of PT Garuda Indonesia (Persero) Tbk using secondary data such as financial statements and annual report of PT Garuda Indonesia (Persero) Tbk and spreads forward and call spread option. The analytical method that used is the method of simulation on alternative methods of hedging foreign exchange rates. Results of the study revealed that the cross currency swap contracts held by the company in 2014 have shown positive results where PT Garuda Indonesia (Persero) Tbk can make a profit of USD 29 770. Because financially, hedging is only intended to protect the interest payments on loans and credit bond investment, the company still has the potential to bear the profit or loss on the change in exchange rates other operations against the US Dollar.Keywords: Management of foreign exchange, cross bilateral swap transaction, forward contracts, call option, the cost of hedging, profitability, and profit and loss on foreign exchange.

The usage of currency derivatives in multilateral banks

Purpose– The purpose of this paper is to investigate the extent to which multilateral banks (MBs) use currency derivatives (CDs) to hedge and speculate in managing currency risk. It aims to provide an empirical assessment of CDs products used by MBs as a group not studied before.Design/methodology/approach– Quantitative hypothesis regarding the usage of CDs to minimize adverse impact of currency risk was tested usingztest about population proportion.Findings– The results show that MBs are using CDs in the following order of importance: currency swaps, currency forwards, currency options and currency futures primarily to hedge currency risk.Research limitations/implications– The results of the study can be generalized only for MBs, given their peculiar characteristics as wholesale banks, which are owned mainly by governments and are generally not listed in the stock exchanges.Originality/value– The study is of value to those interested in the multilateral banking industry. The authors acknowledge that it is the first study providing empirical evidence on CDs’ usage by MBs as a group. The results are particularly useful to managers of MBs in terms of helping them to make choices in usage of CDs. The paper has also policy implications in terms of justifying the current self-regulatory status, shareholder monitoring and governance of MBs, as they do not speculate with CDs.

Policy Configurations of PRC and East Asian Emerging Economies after the Global Financial Crisis: An Analysis of Trilemma Indexes

This article predicts future policy configurations of PRC (People’s Republic of China) and East Asian emerging economies using Mundell’s trilemma and its quantitative measurement. Due to fear of capital flows and exchange-rate volatility, the East Asian emerging economies may still choose a collective exchange rate stability mechanism, which constitutes exchange rate stability, monetary independence, and limitation on capital flows with the support of precautious reserve accumulation and multilateral currency swaps. That is, a Bretton Woods-style mechanism will still be feasible after the global financial crisis. On the other hand, East Asia may be willing to decrease precautious reserve accumulation once a new international currency can be launched. However, the PRC’s attitude will be the critical factor.

Market perceptions of US and European policy actions around the subprime crisis

This paper explores the impacts of key policy actions by US and European authorities on stock returns of systemically important banks in Europe and US around the subprime crisis. We find that the US policy announcements had a stronger impact on the European and US banking industry than the European policy announcements. In particular, the announcements of monetary policies by the US authorities were accompanied by higher abnormal returns compared to related announcements of European authorities. We also find that the policy announcements, regardless of which side of the Atlantic the news arrived from, has increased the return volatility during the crisis. We further analyze the reactions of implied volatility. The findings suggest that the currency swaps had a non-negligible effect in reducing future uncertainty.

International Monetary Reform: A Critical Appraisal of Some Proposals

This paper reviews some of the current debates on the reform of the international monetary system. Despite its deficiencies, the United States (US) dollar will remain the dominant currency and Special Drawing Rights (SDR) cannot serve as either an international medium of exchange or a reserve currency. The International Monetary Fund (IMF) has changed its position to accept capital controls under certain circumstances. Refining control instruments better tuned to present day markets may bring about greater acceptance. The 2008–2009 global financial crisis has dimmed much of the earlier hope for the multilateralized Chiang Mai Initiative. The currency swap arrangements portend a new form of international cooperation. Finally, for the Group of Twenty (G20) to matter, the systemically important countries need to ensure the stability of their financial systems and economies.

Path-Dependent Multicurrency Interest Rate Derivatives

This paper derives the arbitrage-free pricing formulae and hedging ratios of path-dependent multicurrency interest rate derivatives in continuous time. The exchange rates and the zero-coupon bond prices are modeled by multivariate log-normal processes with an arbitrary number of random factors. The exact pricing formulae are obtained by solving the time-evolution equation of the contingent claims described by a multi-dimensional Kolmogorov field equation. Applications to the Asian options and Bermudan options are given as examples. Several European options on currency swaps, forwards and futures contracts are also illustrated as special cases. These exact solutions are factor-independent and explicitly depend on the instantaneous covariances of the return rates of the exchange rates and the zero-coupon bonds. By scaling the historical covariances obtained from the market data, one can easily calibrate the volatility surface to match the vanilla options.

The Politics of Rescuing the World's Financial System: The Federal Reserve as a Global Lender of Last Resort

During the financial crisis of 2007-10, the Federal Reserve (Fed) served as a global lender of last resort by establishing currency swap agreements with 14 central banks, including several in East Asia, to provide dollar liquidity to banks in foreign jurisdictions. These agreements were controversial internationally because the Fed selectively established swaps with some central banks and not others, raising concerns about access to the Fed’s dollar-creating facilities. Within the U.S. Congress, the swaps were controversial because they appeared to be a new and unauthorized form of foreign aid. I analyze both the Fed’s decision to establish swap lines with certain central banks and the congressional response to these arrangements. I find that the Fed was more likely to establish swaps with central banks whose jurisdictions were important to U.S. commercial banks, suggesting that the Fed discriminated in ways that served U.S. interests. I also analyze subsequent congressional voting on legislation that would enhance the Fed’s transparency with respect to its transactions with foreign central banks. I find that campaign contributions from commercial banks significantly reduce the likelihood that a representative voted “yes” on the bill. I also find that right-wing representatives were far more likely than their left-wing peers to support this bill, which suggests that new coalitions are forming on the role of the Fed in the (global) economy.

Redback Rising: China's Bilateral Swap Agreements and Renminbi Internationalization

For several years now, China has implemented policies to promote the international use of its national currency, the Renminbi (RMB). As part of these efforts, the People's Bank of China (PBC) has negotiated 25 bilateral currency swap agreements (BSAs) with foreign central banks. These make it easier for firms in both China and its partner countries to settle cross-border trade and direct investment in RMB. We seek to explain why China and these countries cooperate via BSAs. We theorize that trade and direct investment interdependence relate to dyadic BSA cooperation via two mechanisms: financing insulation from international liquidity shocks and reduced transaction costs of cross-border exchange for local firms. Additionally, we expect the presence of preferential trade agreements (PTAs) and bilateral investment treaties (BITs) will increase the probability of dyadic BSA cooperation. BSAs are natural extensions of these existing agreements. They represent an additional layer of state-level formal cooperation that further reduces barriers to cross-border trade and direct investment. Our empirical analysis finds that both de facto trade interdependence and de jure economic integration via PTAs and BITs increase the probability of BSA cooperation between China and partners.

Practical Applications of Commercial Real Estate Risk Management with Derivatives

Commercial real estate is a huge and significant investment in many global institutional portfolios, but the use of derivatives in this market has been quite limited to date. That’s a pity. Portfolio managers who are willing to step forward and apply some of the derivatives tools currently available in commercial real estate will find immediate and practical benefits, say authors Frank Fabozzi, Professor of Finance at <b>EDHEC Business School</b> and Editor of <b><i>The Journal of Portfolio Management</i></b>, and <b>Kent Business School</b> professors Silvia Stanescu and Radu Tunaru. For this <b><i>Practical Applications</i></b> report, we spoke with <b>Greg MacKinnon</b>—Director of Research at the <b>Pension Real Estate Association</b> and co-editor of the <b><i>JPM Special Real Estate Issue</i></b> in which the article appeared. <b>TOPICS:</b>Real estate, CMBS and commercial mortgage loans, interest-rate and currency swaps

Does CDS Premium Most Predict Sovereign Default Risk?

This paper empirically analyzes the price discovery process between Korean sovereign CDS premium, spread of Korean government debt, Won-Dollar currency swap rate, and Won-Dollar FX rate. With the global financial and fiscal crisis, especially in the U.S. and Euro-zone, the interests in sovereign default risk have risen. Interests in CDS, an OTC credit derivative contract based on debt issuer’s default risk, also have increased. A large number of presses have reported that CDS premium would be the best international market indicator for the default risk taken or transferred. However, internationally the CDS market liquidity has not been sufficient enough to validate its properties. Hence, based on empirics, this paper discusses whether Korean sovereign CDS premium can be considered as an appropriate indicator of sovereign credit risk in the Korean economy. Other largely accepted indices which contain the similar information about Korean economic fundamental and Korean external sovereign credit risk are also analyzed and compared: the spread of Korean government debt, Won-Dollar Currency Swap Rate, and Won-Dollar FX rate. Our findings include: (a) in the price discovery process, Won-Dollar spot rate contributes to the price discovery especially most ‘during the financial crisis period’ and the ‘entire period’ (b) Within the period ‘after the financial crisis’, CDS premium and the other indices have mutual influences on the price discovery process higher than the period ‘before the financial crisis’ (c) while Won-Dollar forward rate shows the similar result with Won-Dollar spot rate, NDF rate and CDS premium make the largest mutual influence on price discovery in the period ‘before the financial crisis.’

A Comparison of the Long Term Interdependence of Southeast Asian Equity Markets

(ProQuest: ... denotes formulae omitted.)I. IntroductionThe precipitous fall of stock market indexes of the major South and East Asian economies which happened in late 1997 inspired researchers to investigate the 'interdependence' and 'contagion' debacle across the region. Controversial arguments that emphasize strong market linkage between markets do so simply for the fact that there are co-movement of markets and risks are generally country-specific (Daly, 2003). The reinforcement of the notion of international diversification that defines the primary motivation for risk-averse investors, drawn by 'portfolio rebalancing', is a critical tenet of the much studied 'Efficient market hypothesis. In contrast to the investor's desire for a relatively low correlation, contagion effect causes the crisis spill over to markets with relatively little or no 'economic linkage'. The presence of the 'contagion' undermines much of the rationale of 'portfolio rebalancing' (Islam et al., 2013). To understand the state of interdependence between markets, it is crucial to understand individual behavior contributing to shock transmission. While much of the state of contagion can best be assessed with dynamic conditional mean and variance, the essential long term association may call for unique marginal reconstructions.The major Southeast Asian economies prior to the Asian crisis have attracted half of the total capital inflows in Asia. High interest rates for seekers of higher returns primarily found Asian markets to be much more attractive than European markets. The increased capital investment eventually resulted in higher-leveraged economies, creating an asset bubble. As some critics suggested, accelerated growth such as that of the Southeast Asian region would only bring prosperity if improvement of total factor productivity surpassed immediate capital expansion (Krugman, 1994). The situation was made worse in the face of capital outflows, as many Asian economies shifted from fixed to floating exchange rate regimes, and faced immense depreciative pressure.The first degree markets are the crisis markets (Indonesia, South Korea and Thailand) from which shock is believed to have spilled over to the Philippines, Malaysia and Singapore (Secondary crisis markets) and into many other Asian economies. Thailand, as the ground zero market, had to rely on Structural Adjustment Package (Khan, 2004). This compelled the Hong Kong government, which previously allowed short selling by speculators, to impose strict capital controls and direct capital market intrusion (Corbett and Vines, 1999). In contrast, Malaysia shifted from a floating to a fixed exchange regime, and profound restrictions were imposed. South Korean currency devaluation then quickly doubled. However, South Korea, with proper policy in place, tripled its per capita GDP in the eventually. China and Singapore allowed capital outflow, but successfully recovered due to their improved total factor productivity.It did not take very long before the Asian economies in crisis regained their previous form. Nonetheless, they were initially throttled by hasty liberalization, lack of corporate governance and proper financial controls (Daly, 2003). Among others, there were things such as the abrupt lifting of the credit ceiling, and restrictions on the rate of return as emphasized by Montes and Popov (1998). During the periods following this turmoil, developing economies quickly responded with foreign currency reserves, and 'Pan Asian currency swaps' were introduced as insurance against individual and country specific risks. Interestingly, nations such as Japan, China and India restricted their economies from building up extensive 'foreign exchange reserves', shifting funds to US treasury bonds, mortgage markets and securities, leading to the development of an asset bubble in the US.The most significant economic crisis in recent history, the Global Financial Crisis (GFC) of 2007-2008, warrants much investigation. …

Official FX interventions through derivatives

We use high-frequency data to study the effects of currency swap auctions carried out by the Brazilian Central Bank on the USDBRL exchange rate. We find that official currency swap auctions impact the exchange rate in a significant way, even though they do not directly alter the supply of foreign currency in the market. We show that during our sample period auctions of contracts in which the Central Bank took a short position in USD had larger effects than those in which the Central Bank took a long position. The supply of currency swaps to the market provides an alternative for traders that demand foreign currency for financial (speculative or hedging) rather than transactional reasons, and thus affects the demand for foreign currency and its price. This mechanism is likely to be particularly relevant when forecasters extrapolate exchange rate trends at short-term horizons.

Dislocations in the Currency Swap and Interest Rate Swap Markets: The Case of Korea

This article empirically investigates the determinants of the deviations from fundamental levels of both the currency swap (CRS) and the interest rate swap (IRS) rates in Korea. This study also analyses the inter‐linkages between the swap and bond markets in Korea. To this end, a rolling VAR model is estimated incorporating the CRS rate, the IRS rate and the Korean Treasury bond (KTB) rate. It is found that hedging activities and risk factors are significant determinants of the deviations from fundamental levels of the IRS as well as the CRS rate in Korea. Moreover, the covered interest parity (CIP) deviation in the CRS market plays a role in explaining the deviation from the fundamental level of the IRS rate. There are contemporaneous links among the CRS rate, the IRS rate and the KTB rate, and a CRS rate shock significantly affects both the IRS and the KTB rates. © 2014 Wiley Periodicals, Inc. Jrl Fut Mark 35:455–475, 2015

The Use of Financial Derivatives in Emerging Market Economies: An Empirical Evidence from Bosnia and Herzegovina's Non-Financial Firms

This paper discusses development of financial derivatives markets in emerging market economies, focusing on the use of financial derivatives in risk management purposes of non-financial firms in Bosnia and Herzegovina. For achieving the research goals authors collected data on the derivatives market structure and types of derivative instrument traded, focusing commercial banks, because of the authors’ prior knowledge of the derivatives market. Additionally, in order to assess the current state and development perspectives of derivatives usage by the non-financial firms, authors conducted a research on the random sample of non-financial firms, using data from the Foreign Trade Chamber of Bosnia and Herzegovina as well as the information from lists of derivatives users-clients provided by some banks of Bosnia and Herzegovina. The research shows that derivatives market in the country exists as an over-the-counter market, where banks play dominant role and offer different types of derivative instruments. Three types of derivatives are being offered: currency forwards, currency swaps, and interest rate forwards. The main reason for the poor offer is low demand, lack of non-financial firms’ knowledge about benefits of derivatives, and low number of business operations on the global markets by the non-financial firms.

Taming Currency Swaps to Curb India’s Current Account Deficit- A Kindle of Hope

Current account balance appears to be an impenetrable pecuniary concept. However in the economies that spend extravagantly overseas than they accumulate, the current account is the end at which international economics crash with political veracity. When countries lope outsized discrepancies, business tycoons, trade unions, law-makers, analysts and bureaucrats are customarily brisk to tip reproving fingers at trading partners and lay the blame on unwarranted conventions. At the same time as India’s Central government leads off to deal with the economic disorders the country faces, its stance cannot but hinge on the Current Account Deficit (CAD). It is that deficit which is ‘fundamental’ to rupee’s corrosion and prompts collateral consequences that intimidates much harm. The seethe avowal these days is ‘currency swaps’, an artifact of financial engineering which seems to be the only panacea to treat volatility in the rupee and eventually India’s unbridled current account deficit. In this paper I endeavored to seize a closer gaze at the perceived implications of currency swaps and its utilization to curb India’s current account deficit.

Global Governance, Currency and Trade: Implications of One on the Other, Common Problems and How to Address Cooperation Through Law at the International Level

How to deal with the impacts of the exchange rate on the trade balance of Brazil? There is not a single answer to such question. In order to find out some legal approaches for this matter, this paper aims to describe and analyze the role of the IMF, WTO and the governments of Brazil and the United States on the currency misalignments, especially the extraterritorial effects of such misalignment on the Brazil’s bilateral trade with the United States. The article concludes that the Currency Swap Agreements and other bilateral solutions may minimize the distortions that the Brazilian balance of payment against the USA is carrying, due to the lack of legal solutions for the problem of the exchange rate misalignments that Brazil is facing.