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Interest Rates Swa[s Require Markets to be Inefficient - Essay Example
Finance & Accounting
Pages 4 (1004 words)
Topic: Interest rates Swaps Require Markets to be Inefficient Institution: Date: Foreign exchange market is an important component of world business and trade undertakings. It outlines the extent to which international trade can be undertaken…
Currency exchange tailors international exchange transactions. Interest rates are characteristic of risks that result from the various key constituents of the foreign exchange market. One of these constituents is the interest rate swaps. Foreign exchange and interest rate operations provide opportunities for hedging in the foreign exchange market. Interest rate swaps in this context can be considered to be unique financing arrangements that allow corporations to significantly cut on their credit costs while improving their control on risks that accrue from interest rates and exposure to foreign exchange transactions. Market for currencies has considerably grown across the entire globe, and so has the interest rate swaps total outstanding amounts in the world (Lowenstein, 2000, pg. 148). The contributing currencies to this fast growth include but not limited to the US dollar, Euro, Japanese Yen and British Pound. Cash flow exchanges in an interest rate swap are undertaken by two parties, who are bound to the interest rate swap agreement. Both parties have high expectations of benefiting from the interest rate swap. Where only one currency is involved, the resultant swap is called an interest rate swap. On the other hand, where multiple currencies are involved, a currency swap prevails. Corporations engage interest rate swaps in their operations for the purpose of achieving well defined goals. ...
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