International Financial Management Essay Example | Topics and Well Written Essays - 2500 words

transnational Financial Management - Essay ExampleInterest range trade winds are especially useful where on one hand, a firm wants to receive/ hold up payment in the form of a varying 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 proximo risk. The first swap was executed over thirty years ago (Corb, 2012). The rationale behind much(prenominal) a derivative instrument is that, both parties to the financial arrangement have their own distinct priorities and have a bun in the ovenments much(prenominal) that in swapping, thither is a mutual benefit to be derived. This benefit arises from three major elements of the not bad(p) grocery The comparative advantage, information asymmetries and fixed rate debt vis-a-vis the embedded options (Flavell, 2010). In essence, the monetary receive one party makes through the swap disregard 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 mart, one party to the contract will incur some monetary loss. ... The most common forms of interest rate swaps include rooted(p) for floating interest rate swap Floating for fixed interest swaps Same currency swaps various 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 temper of the information environment means that firms themselves possess a founder view of their levels of recognise risks. As such, they require a credible way(s) of transmitting such information to the investors within the market. The firms 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 f irm is only able to do this in light of its improving future prospects. both posterior 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 firms communicate 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 firms signal now and its performance in the subsequent period where the firms credit has not risen, the market assumes that the signaling was false and retrospectively the market may downgrade the firms credit rating by more than usual. Secondly, the underlying read/write head 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