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"Currency swaps."
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Valuing currency swap contracts in uncertain financial market
Swap is a financial contract between two counterparties who agree to exchange one cash flow stream with the other according to some predetermined rules. When the cash flows are interest payments of different currencies, the swap is called a currency swap. In this paper, it is assumed that the exchange rate follows some uncertain differential equations, and the currency swap contracts in uncertain financial market are discussed. For dealing with long-term, short-term and super-short circumstances, three currency swap models are proposed, respectively. Their explicit solutions are developed through Yao–Chen formula. Moreover, a numerical method is designed for simplifying calculation. Finally, examples are given to show the effectiveness of the theory developed in this paper.
Journal Article
DOLLAR FUNDING AND THE LENDING BEHAVIOR OF GLOBAL BANKS
A large share of dollar-denominated lending is done by non-U.S. banks, particularly European banks. We present a model in which such banks cut dollar lending more than euro lending in response to a shock to their credit quality. Because these banks rely on wholesale dollar funding, while raising more of their euro funding through insured retail deposits, the shock leads to a greater withdrawal of dollar funding. Banks can borrow in euros and swap into dollars to make up for the dollar shortfall, but this may lead to violations of covered interest parity when there is limited capital to take the other side of the swap trade. In this case, synthetic dollar borrowing also becomes expensive, which causes cuts in dollar lending. We test the model in the context of the Eurozone sovereign crisis, which escalated in the second half of 2011 and resulted in U.S. money market funds sharply reducing their exposure to European banks in the year that followed. During this period dollar lending by Eurozone banks fell relative to their euro lending, and firms who were more reliant on Eurozone banks before the Eurozone crisis had a more difficult time borrowing.
Journal Article
Financial development and central bank bilateral currency swaps: Is there trade effect?
Purpose ― This paper aims to empirically investigate the impact of currency swaps on international trade, given China's differential level of financial development and its currency swap partners. Methods ― The study employes an empirical structural gravity model using datasets encompassing financial development, trade, and intuitive gravity equation variables for 27 countries from 1980 to 2013. The level of financial development and swaps was captured by the interaction term of the disaggregated measure of financial development, such as access, depth, and efficiency, each interacting with currency swaps.Findings ― The findings suggest that currency swaps are essential for trade and exhibit a large trade effect, especially for countries with relatively low levels of financial development. The paper substantiates empirical evidence indicating disparities in financial development across countries, and such differences are important in determining trade patterns. Implication ― Strong financial systems promote trade in advanced economies, whereas the opposite holds true for developing countries. The examination of the influence of financial systems on trade through empirical tests remains important on the research agenda of policymakers and researchers, especially those looking at industry-level import and export data.Originality ― The study delves into the nexus between financial development and trade within the framework of the Central Bank bilateral currency swap network by highlighting the role of financial institutions and market size (depth), activity (access), and efficiency. In addition, it addresses the drawbacks of previous empirical research that largely focuses on the private credit-to-GDP ratio as a key proxy for financial development.
Journal Article
A Derivatives Pricing Model with Non-Cash Collateralization
This article proposes a derivatives pricing model with both cash and a non-cash asset posted as collateral for a derivatives contract. We assume that the participant sources funds from the repo market for the posted non-cash collateral. Our pricing formula is based on the investment of the received collaterals. For the pricing formula, we discount the future derivatives value using a combination of the collateral and repo rates under a risk-neutral measure. Thus, our pricing model constructs a multi-curve framework. We calibrate our pricing model for JPY interest rate derivatives and then show that our model with non-cash collateralization is closer to the real price than the existing pricing formulae (i.e., the cash collateralization and simple short rate models). TOPICS: Derivatives, interest-rate and currency swaps, quantitative methods, statistical methods, risk management, credit risk management Key Findings ▪ A derivatives pricing model when cash and a non-cash asset are posted as collateral is proposed. The non-cash collateral receiver exchanges the posted collateral for cash in the repo market. ▪ Under this framework, the discount rate in the resulting pricing formula is given as the weighted average of the collateral and repo rates weighted with the amount of the cash collateral. ▪ The accuracy of the proposed pricing formula is superior to the pricing formula with the OIS discount that has been common after the financial crisis in 2008.
Journal Article
Drawing the line: the politics of federal currency swaps in the global financial crisis
Injecting over two trillion dollars into the international economy, the Federal Reserve effectively operated as an international lender of last resort during the 2008 financial crisis. Over half a trillion dollars went to foreign central banks through bilateral arrangements known as Central Bank Liquidity Swaps. While studies show that a key determinant of a country's chances of receiving Fed liquidity was the exposure of US banks to the foreign economy, the literature overlooks the ambiguous and politicized nature of the Fed's decision-making that explains the selection of emerging market swap recipients. Through a consideration of all economies that officially requested a swap line, including those rejected, this article analyses the bilateral politics of Fed swaps. By evaluating transcripts of the Fed's deliberations, it identifies strategic motivations underlying the Fed's decision-making and argues the Fed was more likely to grant a swap to economies that shared its policy preferences for greater capital account openness. Further, the article argues that the influence of shared policy preferences was mediated by political and diplomatic considerations. The article concludes that the Fed strategically chose its emerging economy partners to reinforce economic alliances, particularly with those who experienced increased influence in economic governance post-2008.
Journal Article
The Impacts of Policy Infrastructures on the International Use of the Chinese Renminbi
Despite burgeoning research on the internationalization of the Chinese renminbi, there has been surprisingly little systematic analysis of how the renminbi is actually used in foreign markets. This study provides a cross-country analysis of renminbi use in offshore foreign exchange markets, with special attention to the effects of the cooperative policy measures adopted by China and foreign states to promote the renminbi’s international use. We find that a country’s participation in the Renminbi Qualified Foreign Institutional Investor scheme (which expands its renminbi investment opportunities) and its establishment of an offshore renminbi clearing bank (which provides better renminbi payment services), but not its entry into a renminbi–local currency swap agreement, facilitate use of the renminbi in its foreign exchange markets. States have played a significant role in the rise of the renminbi as a newly internationalizing currency.
Journal Article
Medical supplies agencies and access to foreign currency in resource-limited settings: case studies from Sudan
According to the agreement (1992-2001), revenues collected were regularly converted to foreign currency because medicines were usually imported. According to the agreement, local funds generated from NMSF medicine sales and allocated for overseas procurement of medicines are swapped for the equivalent foreign currency allocation at the UNDP Sudan office. Both NMSF (2016-2019) and the RDF-KS (1992-2001) maintained the prescription cost to end users at half the prices charged in private pharmacies while making a surplus to finance its operating and development costs. [...]the availability of foreign currency allowed a regular supply of medicines from abroad to these organizations, and consequently to public health facilities. [...]the availability of foreign currency protected the RDFs at both national and state levels against excessive losses by devaluation of local cash in hand as a result of local currency inflation.
Journal Article
Financial safety nets: Bilateral currency swap lines: Facility and risk
Recent decades have seen Asian economies make greater use of bilateral currency swap lines. Both Japan and China deploy these facilities, though some difference in approach has become apparent, with China allowing its facilities to be used not only to facilitate settlements in trade and investment using the renminbi but also to resolve balance of payment crises - an approach that is not free of risk.
Journal Article
IMPLIED MONETARY POLICY EXTRACTED FROM INTEREST RATE SWAPS IN CHILE
Este artículo describe una metodología que utiliza swaps de tasa de interés en pesos chilenos para extraer sendas de tasas de política monetaria futuras, junto a sus probabilidades de ocurrencia, con nodos en eventuales reuniones del Banco Central. Se concluye que tales sendas implícitas de política contienen premios por plazo que están correlacionados con el ciclo de política. Así, los derivados de tasas han sobrestimado de manera consistente la senda de política monetaria futura, incorporando en sus precios aumentos de TPM más frecuentemente que recortes de tasa y han subestimado la probabilidad de recortes. Más aún, el nivel de tasas implícitas ha sido determinado por la parte corta de la curva en vez de por expectativas sobre el ciclo económico. El resultado es que extraer tasas implícitas de la curva swap es un método inefectivo para predecir tasas futuras y que estas no anticipan decisiones de política. Estos resultados ayudan a entender el perfil asimétrico del riesgo de movimientos futuros de política monetaria y pueden contribuir al diseño de estrategias de cobertura.
Journal Article