Finance and Forex

US GOVERNMENT

2009-08-24T04:35:00.000-07:00

The U.S. government knew that the costs of World War I would be great, and the question of how to pay for the war was matter of intense debate. The resulting decision was to pay for the war with a balance between higher taxes (see the War Tax Act) and government debt. Traditionally, the government borrowed from other countries, but there were no other countries from which to borrow in 1917: U.S. citizens would have to fully finance the war through both higher taxes and purchases of war bonds.[1]
The Treasury raised funding throughout the war by floating $21.5 billion in 'Liberty bonds.' These bonds were sold at subscription where officials created a coupon price and then sold it at Par value. At this price, subscriptions could be filled in as little as one day, but usually remained open for several weeks, depending on demand for the bond.[1]
After the war, the Liberty Bonds were reaching maturity, but the Treasury was unable to pay each down fully with only limited budget surpluses. The resolution to this problem was to refinance the debt with variable short and medium-term maturities. Again the Treasury issued debt through a fixed-price subscription, where both the coupon and the price of the debt were dictated by the treasury.[1]
The problems with debt issuance became apparent in the late-1920's. The system suffered from chronic oversubscription, where interest rates were so attractive that there were more purchasers of debt than supplied by the government. This indicated that the government was paying too much for debt. As government debt was undervalued, debt purchasers could buy from the government and immediately sell to another market participant at a higher price.[1]
In 1929, the U.S. Treasury shifted from the fixed-price subscription system to a system of auctioning where 'Treasury Bills' would be sold to the highest bidder. Securities were then issued on a pro rata system where securities would be allocated to the highest bidder until their demand was full. If more treasuries were supplied by the government, they would then be allocated to the next highest bidder. This system allowed the market to set the price rather than the government. On December 10, 1929, the Treasury issued its first auction. The result was the issuing of $224 million three-month bills. The highest bid was at 99.310 with the lowest bid accepted at 99.152.[1]
Foreign countries later started to buy U.S. debt as an investment of their surplus U.S. Dollars. Nowadays, China is the primary holder of U.S. bonds. China owns so many U.S. bonds, there is fear that if they stop buying them, the U.S. economy would collapse. The bonds issue further links the U.S. and China economies so tightly that both fear the consequences of a potential slow down in China's purchase of those bonds. In her visit to China, U.S. State Secretary Hillary Clinton called on authorities in Beijing to continue buying U.S. Treasuries, saying it would help jumpstart the flagging U.S. economy and stimulate imports of Chinese goods.[2]
As the economic recession continues, more doubts arise over the real value of U.S. treasury securities. Though carefully worded, Chinese premier Wen Jia Bao's warning about possible devaluation of Chinese held U.S. bonds was taken very seriously by Washington:
"Of course we are concerned about the safety of our assets. To be honest, I'm a little bit worried," Wen said at a news conference Friday after the closing of China's annual legislative session. "I would like to call on the United States to honor its words, stay a credible nation and ensure the safety of Chinese assets."[3]
However, it is important to note that such comments, while critical, were very likely indicative of Chinese "gesturing" ahead of the April 1st G-20 Economic Summit. As of April 2009, the U.S. dollar had rallied YTD against all other major world currencies. Further, as of April 2009, China remained the number one holder of U.S. debt.
On March 18, 2009, the Federal Reserve used quantitative easing "to help improve conditions in private credit markets, the Committee decided to purchase up to $300 billion of longer-term Treasury securities over the next six months."[

ASIA PROSPECT

2009-08-24T04:23:00.000-07:00

Likewise, when the global information technology bust dragged Asia into recession in 2001, forecasters turned out to be much too gloomy about Asia’s prospects. Once again, emerging Asia bounced back fairly briskly. Westerners have always been too quick to pronounce the death of the Asian economic miracle. This may be wishful thinking, but it also reflects some misunderstandings about the ingredients of Asia’s success. This year it was widely predicted that Asia’s economies would not recover until after America and Europe had revived. Yet Asia’s supposedly export-dependent economies have resumed growth before the rest of the world. How can that be?
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Sceptics argue that the pick-up simply reflects a temporary boost from rebuilding inventory, with no real increase in demand. Firms had cut production to below the level of sales in order to shed excess inventories, so now they need to reopen factories. This may be a factor in some countries, but in others firms are still running down their stocks.
In South Korea the decline in inventories accelerated in the second quarter, and the leanness of stocks bodes well for further gains in production over the rest of this year. Instead, the recovery has been led by investment and consumer spending. South Korea’s private consumption rose by an annualised 14% in the second quarter. In China fixed investment (on a GDP-consistent basis) is running more than 20% higher than a year ago, real consumer spending in urban areas is up by almost 11% and car sales have surged by 70%.
One reason why Asia’s emerging economies have been able to rebound well before those in the rich world is that their downturn was caused only partly by the slump in America. In 2008 domestic spending was squeezed by higher prices for oil and food (which account for a much higher share of household budgets than in other countries) and by tighter monetary policies, aimed at curbing inflation. China’s growth, for instance, began to slow well before global demand stumbled, as tight credit policies to prevent the economy overheating caused the property market and construction to collapse.
Across the region, aggressive fiscal and monetary stimulus has helped revive domestic demand. Asia has had the biggest fiscal stimulus of any region of the world. China’s package grabbed the headlines, but South Korea, Singapore, Malaysia, Taiwan and Thailand have all had a government boost this year of at least 4% of GDP. Most Asian countries, with the notable exception of India, entered this downturn with sounder budget finances than their Western counterparts, so they had more room to spend. Bank of America Merrill Lynch forecasts that the region’s public debt will rise to a modest 45% of GDP at the end of 2009, only half of the average in OECD countries.
Moreover, pump-priming has been more effective in Asia than in America or Europe, because Asian households are not burdened with huge debts, so tax cuts or cash handouts are more likely to be spent than saved. It is also easier in a poorer country to find worthwhile infrastructure projects—from railways to power grids—to spend money on.
In China the easing of credit has been even more important than its fiscal stimulus. Although lending slowed sharply in July, new lending by banks in the first seven months of this year was almost three times its level a year earlier. And across the whole of emerging Asia, cheaper money has been more potent in lifting spending than in the West. This is because, unlike in America and Europe, local financial systems are not crippled, so banks are able to lend more. And since Asian households and firms had not previously been on a borrowing binge (South Korea is an exception), they can afford to borrow more.
Growth rates will almost certainly moderate after the second quarter’s astonishing bounce. Even so, Mike Buchanan, an economist at Goldman Sachs, has raised his forecast for GDP growth in emerging Asia to 5.6% for 2009 as a whole and 8.6% in 2010. He expects China to grow by a breathtaking 9.4% this year and 11.9% next.
India’s GDP is forecast to grow by a more modest 5.8% in this fiscal year (ending March 2010). Exports accounted for only 15% of India’s GDP in 2008, compared with 33% in China, so India should have been much less affected by the global downturn. But because of its dire fiscal finances (a budget deficit of 10% of GDP last year), the government has had much less room to spur growth. The poor monsoon rains are also expected to reduce farm output this year. However, Mr Buchanan expects growth to increase to 7.8% next year.

THE BUSINESS

2009-08-12T03:30:00.000-07:00

Business or Market communication often referred to as 'macros' has how become a part of everyone's job description. Internet has made the world smaller, and bussiness lager.In a situation where there are large clientele, practicaly no work is possibke without proper business communication.

Business communcation means constant exchange of information it never stops,not even after the project completion. Here's how a business communication becomes good business communication written or oral business communication should be logical structured and targeted at the right audience.Guidelines for accounting for financial derivatives are given under IFRS 7. Under this standard, “an entity shall group financial instruments into classes that are appropriate to the nature of the information disclosed and that take into account the characteristics of those financial instruments. An entity shall provide sufficient information to permit reconciliation to the line items presented in the balance sheet” [1]. Derivatives should be grouped together on the balance sheet and valuation information should be disclosed in the footnotes. This seems fairly straightforward, but IASB has issued two standards to help further explain this procedure. The International Accounting Standards IAS 32 and 39 help to give further direction for the proper accounting of derivative financial instruments. IAS 32 defines a “financial instrument” as “any contract that gives rise to a financial asset of one entity and a financial liability or equity instrument of another entity” [2]. Therefore, a forward contract or option would create a financial asset for one entity and a financial liability for another. The entity required to pay the contract holds a liability, while the entity receiving the contract payment holds an asset. These would be recorded under the appropriate headings on the balance sheet of the respective companies. IAS 39 gives further instruction, stating that the financial derivatives be recorded at fair value on the balance sheet. IAS 39 defines two major types of hedges. The first is a cash flow hedge, defined as: “a hedge of the exposure to variability in cash flows that (i) is attributable to a particular risk associated with a recognized asset or liability or a highly probable forecast transaction, and (ii) could affect profit or loss” [3]. In other words, a cash flow hedge is designed to eliminate the risk associated with cash transactions that can affect the amounts recorded in net income. Below is an example of a cash flow hedge for a company purchasing Inventory items in year 1 and making the payment for them in year 2, after the exchange rate has changed.
Notice how in year 2 when the payable is paid off, the amount of cash paid is equal to the forward rate of exchange back in year 1. Any change in the forward rate, however, changes the value of the forward contract. In this example, the exchange rate climbed in both years, increasing the value of the forward contract. Since the derivative instruments are required to be recorded at fair value, these adjustments must be made to the forward contract listed on the books. The offsetting account is other comprehensive income. This process allows the gain and loss on the position to be shown in Net income.
The second is a fair value hedge. Again, according to IAS 39 this is “a hedge of the exposure to changes in fair value of a recognized asset or liability or an unrecognized firm commitment, or an identified portion of such an asset, liability or firm commitment, that is attributable to a particular risk and could affect profit or loss” [3]. More simply, this type of hedge would eliminate the fair value risk of assets and liabilities reported on the Balance sheet. Since Accounts receivable and payable are recorded here, a fair value hedge may be used for these items. The following are the journal entries that would be made if the previous example were a fair value hedge.

Again, notice that the amounts paid are the same as in the cash flow hedge. The big difference here is that the adjustments are made directly to the assets and not to the other comprehensive income holding account. This is because this type of hedge is more concerned with the fair value of the asset or liability (in this case the account payable) than it is with the profit and loss position of the entity.

[edit] Under US GAAP
The US Generally Accepted Accounting Principles also include instruction on accounting for derivatives. For the most part, the rules are similar to those given under IFRS. The standards that include these guidelines are SFAS 133 and 138. SFAS 133, written in 1998, stated that a “recognized asset or liability that may give rise to a foreign currency transaction gain or loss under Statement 52 (such as a foreign-currency-denominated receivable or payable) not be the hedged item in a foreign currency fair value or cash flow hedge” [4]. Based on the language used in the statement, this was done because the FASB felt that the assets and liabilities listed on a company’s books should reflect their historic cost value, rather than being adjusted for fair value. The use of a hedge would cause them to be revalued as such. Remember that the value of the hedge is derived from the value of the underlying asset. The amount recorded at payment or reception would differ from the value of the derivative recorded under SFAS 133. As illustrated above in the example, this difference between the hedge value and the asset or liability value can be effectively accounted for by using either a cash flow or a fair value hedge. Thus, two years later FASB issued SFAS 138 which amended SFAS 133 and allowed both cash flow and fair value hedges for foreign exchanges. Citing the reasons given previously, SFAS 138 required the recording of derivative assets at fair value based on the prevailing spot rate [5].

Business to business

2009-07-02T18:45:00.000-07:00

Patent Licensing & Enforcement Companies ("P-LECs"): These are firms that acquire patents for the sole purpose of securing licenses and/or damages awards from infringing parties. Perhaps the most famous P-LEC is NTP, Inc., which has successfully asserted patents related to email push technology. Another name for a P-LEC is "patent troll," although this is viewed as a pejorative reference. Recently, hedge funds have raised capital for the specific purpose of investing in patent litigation. One such hedge fund is Altitude Capital Partners, which is based in New York.
· Royalty stream securitizers: These are firms that are engaged in the buying and selling of what are essentially specialized asset-backed securities. The assets that are securitized are typically intellectual properties, such as patents, that have been bearing royalties for a period of time. Royalty Pharma is a well known firm that uses this business model, and which has done by far the largest and most high-profile deals in this space.[2] Royalty Pharma handled what many consider to be the first pharmaceutical patent-backed securitization to be rated by Standard and Poors, which involved a patent on the HIV drug Zerit.[3] The other parties involved in the Zerit transaction were Yale (the owner of the patent) and Bristol Myers Squibb.
· Reinsurers: These are firms that use the techniques of reinsurance to mitigate intangible asset risks. In the same way that some firms issue Cat bonds to mitigate the risks associated with extreme weather, earthquakes, or other natural disasters, firms exposed to substantial intangible risk can issue "intangible asset risk-linked securities" that transfer intangible risk to hedge funds and other players in the capital markets with a sufficient appetite for risk. Steel City Re, which is based in Pittsburgh, is a thought leader regarding the use of risk transfer techniques to protect and recover intangible asset value.[4]
· Market makers: Firms that are working to provide more liquidity to the market for intellectual property. Early market makers offered on-line intellectual property exchanges where buyers and sellers could exchange rights in licensed intellectual property, usually patents. In 2008, Ocean Tomo launched[5], which it styled as "the only public marketplace that allows buyers and sellers to place and receive offers for their intellectual property in a completely transparent fashion." Patent Bid Ask now complements Ocean Tomo's experience in providing multi-lot, live auctions for intellectual property. The next Ocean Tomo auction is scheduled to take place on June 25-26, 2008 in Amsterdam. On April 22, 2008, Ocean Tomo reported[6] that it had transacted approximately $70 million in its IP auctions across Europe and the United States. In 2009, The Intellectual Property Exchange International (IPXI), headquartered in Chicago, will begin operations as the world’s first stock exchange with an intellectual property focus.
· Investment Research Firms: Companies that provide specific advice to investors on intellectual property issues. Recently, hedge fund managers have been hiring patent attorneys to follow and handicap outcomes in high stakes patent cases. IPD Analytics, which is based in Miami, is known for is research reports on patent litigation pending in the United States district court as well at the United States Court of Appeals for the Federal Circuit.
· 2000: BioPharma Royalty Trust completes the $115 million securitization of a single Yale patent with claims covering Stavudine, which is a reverse transcriptase inhibitor and the active ingredient in the in the drug Zerit. This was the first publicly rated patent securitization in the U.S. At the time of the deal, Bristol Myers Squibb had the exclusive rights to distribute Zerit in the U.S. Not long after closing slow sales of Zerit along with an accounting scandal at Bristol Myers Squibb triggered the accelerated and premature amortization of the transaction. Many observers believe that this deal was ultimately unsuccessful because of a lack of diversification as it involved a single patent and a single licensee.
· 2005: UCC Capital Corporation securitization of BCBG Max Azria's royalty receivables generated from worldwide intellectual property rights worth $53 million. This transaction is recognized as the first "whole company securitization" involving primarily intangible assets. UCC Capital Corporation has since been acquired by NexCen Brands, Inc., which is currently helmed by Robert W. D'Loren. NexCen is a vertically integrated global brand management company focused on assembling a diversified portfolio of intellectual property-centric companies operating in the consumer branded products and franchise industries. On May 19, 2008, NexCen issued a press release in which it stated that there was substantial doubt about its ability to continue as a going concern.[7]
· 2005: Ocean Tomo holds its first live IP auction. Although proceeds from the first auction were unremarkable, the relative success of the Ocean Tomo auctions that followed showed that the live auction is a reasonably viable business model for monetizing intellectual property.
· 2006: Marvel Entertainment's film rights securitization in conjunction with Ambac Financial Group to provide a triple-A financial guarantee on a credit facility for Marvel backed by a slate of 10 films to be produced by Marvel Studios and intellectual property related to some of Marvel’s most popular comic book characters
The Intangible Asset Finance Society provides a forum for finance, innovation, legal and management professionals to discover better ways to create, capture and preserve the value of intangible assets.
The Athena Alliance is a non-profit organization dedicated to public education and research on the emerging global information economy. On April 16, 2008 it published[9] a widely-circulated working paper on the topic of intangible asset finance

Gold Money

2009-07-02T18:23:00.000-07:00

DGCs, like all financial institutions and public securities, have a layer of risk in the form of the management of the issuing institution. Controls aimed to limit management risk are called "governance".
GoldMoney is the only DGC that is a government registered money service business [1].
Several companies claiming to be Digital Gold Currencies sprang up and failed between 1999 and 2004, including OS-Gold[5], Standard Reserve[6] and INTGold[7]. All three of these companies failed because the principals diverted deposits for other purposes instead of holding them in the form of gold.
In each of the above cases, account holders lost several million dollars worth of gold when the "institution" failed. However, the warning signs were evident from the beginning. All three of the failed companies were created and operated by people in the high-yield investment program "business", and the people who lost their funds were almost entirely HYIP players. None of the failed pseudo-DGCs had established a governance system to protect the reserves from being pillaged by management.
There are no specific financial regulations governing DGC providers, so they operate under self-regulation. DGC providers are not banks and therefore not subject to bank regulations that pertain to fractional reserve lending. However, DGCs do provide a method for transferring money from one person to another, and may therefore fall under regulations pertaining to currency transactions in some jurisdictions.
The Global Digital Currency Association (GDCA), which was founded in 2002, is a non-profit association of online currency operators, exchangers, merchants and users. The GDCA is an example of the DGC industry's attempt at self-regulation. On their website they claim their goal is to "further the interests of the industry as a whole and help with fighting fraud and other illegal activities, arbitrate disputes and act as escrow agent when and where required."[8] Of the current DGC providers, Pecunix, Liberty Reserve and eight others have become members of the association. It costs one gram of gold to file a complaint if you are not a member, and the list of filable complaints is not exhaustive. Their domain name is registered anonymously through domains by proxy, see whois.

Direct relationship

2009-07-01T04:17:00.001-07:00

There is a direct relationship between declines in wealth, and declines in consumption and business investment, which along with government spending represent the economic engine. Between June 2007 and November 2008, Americans lost more than a quarter of their net worth. By early November 2008, a broad U.S. stock index, the S&P 500, was down 45 percent from its 2007 high. Housing prices had dropped 20% from their 2006 peak, with futures markets signaling a 30-35% potential drop. Total home equity in the United States, which was valued at $13 trillion at its peak in 2006, had dropped to $8.8 trillion by mid-2008 and was still falling in late 2008. Total retirement assets, Americans' second-largest household asset, dropped by 22 percent, from $10.3 trillion in 2006 to $8 trillion in mid-2008. During the same period, savings and investment assets (apart from retirement savings) lost $1.2 trillion and pension assets lost $1.3 trillion. Taken together, these losses total a staggering $8.3 trillion.[116]
Further, U.S. homeowners had extracted significant equity in their homes in the years leading up to the crisis, which they could no longer do once housing prices collapsed. Free cash used by consumers from home equity extraction doubled from $627 billion in 2001 to $1,428 billion in 2005 as the housing bubble built, a total of nearly $5 trillion dollars over the period.[117][118][119] U.S. home mortgage debt relative to GDP increased from an average of 46% during the 1990s to 73% during 2008, reaching $10.5 trillion.[120]
To offset this decline in consumption and lending capacity, the U.S. government and U.S. Federal Reserve have committed $10.5 trillion dollars, of which $2.7 trillion has been invested or spent, as of June 2009.[121] In effect, the Fed has gone from being the "lender of last resort" to the "lender of only resort" for a significant portion of the economy. In some cases the Fed can now be considered the "buyer of last resort."
Economist Dean Baker explained the reduction in the availability of credit this way:
"Yes, consumers and businesses can't get credit as easily as they could a year ago. There is a really good reason for tighter credit. Tens of millions of homeowners who had substantial equity in their homes two years ago have little or nothing today. Businesses are facing the worst downturn since the Great Depression. This matters for credit decisions. A homeowner with equity in her home is very unlikely to default on a car loan or credit card debt. They will draw on this equity rather than lose their car and/or have a default placed on their credit record. On the other hand, a homeowner who has no equity is a serious default risk. In the case of businesses, their creditworthiness depends on their future profits. Profit prospects look much worse in November 2008 than they did in November 2007 (of course, to clear-eyed analysts, they didn't look too good a year ago either). While many banks are obviously at the brink, consumers and businesses would be facing a much harder time getting credit right now even if the financial system were rock solid. The problem with the economy is the loss of close to $6 trillion in housing wealth and an even larger amount of stock wealth.

The New York City headquarters of Lehman Brothers.Economists, economic policy makers and economic reporters virtually all missed the housing bubble on the way up. If they still can't notice its impact as the collapse of the bubble throws into the worst recession in the post-war era, then they are in the wrong profession."[122]
At the heart of the portfolios of many of these institutions were investments whose assets had been derived from bundled home mortgages. Exposure to these mortgage-backed securities, or to the credit derivatives used to insure them against failure, caused the collapse or takeover of several key firms such as Lehman Brothers, AIG, Merrill Lynch, and HBOS.[123][124][124][125]

Business investment

2009-07-01T04:17:00.000-07:00

Financial Product

2009-07-01T04:09:00.000-07:00

The term financial innovation refers to the ongoing development of financial products designed to achieve particular client objectives, such as offsetting a particular risk exposure (such as the default of a borrower) or to assist with obtaining financing. Examples pertinent to this crisis included: the adjustable-rate mortgage; the bundling of subprime mortgages into mortgage-backed securities or collateralized debt obligations (CDO) for sale to investors, a type of securitization; and a form of credit insurance called credit default swaps(CDS). The usage of these products expanded dramatically in the years leading up to the crisis. They vary in complexity and the ease with which they can be valued on the books of financial institutions.
Certain financial innovation may have the effect of circumventing regulations, such as off-balance sheet financing that affects the leverage or capital cushion reported by major banks. For example, Martin Wolf wrote in June 2009: "...an enormous part of what banks did in the early part of this decade – the off-balance-sheet vehicles, the derivatives and the 'shadow banking system' itself – was to find a way round regulation."[79]
The CDO in particular enabled financial institutions to obtain investor funds to finance subprime and other lending, extending or increasing the housing bubble and generating large fees. A CDO essentially places cash payments from multiple mortgages or other debt obligations into a single pool, from which the cash is allocated to specific securities in a priority sequence. Those securities obtaining cash first received investment-grade ratings from rating agencies. Lower priority securities received cash thereafter, with lower credit ratings but theoretically a higher rate of return on the amount invested.[80][81]
For a variety of reasons, market participants did not accurately measure the risk inherent with this innovation or understand its impact on the overall stability of the financial system.[82] For example, the pricing model for CDOs clearly did not reflect the level of risk they introduced into the system. The average recovery rate for "high quality" CDOs has been approximately 32 cents on the dollar, while the recovery rate for mezzanine CDO's has been approximately five cents for every dollar. These massive, practically unthinkable, losses have dramatically impacted the balance sheets of banks across the globe, leaving them with very little capital to continue operations.[83]
Another example relates to AIG, which insured obligations of various financial institutions through the usage of credit default swaps. The basic CDS transaction involved AIG receiving a premium in exchange for a promise to pay money to party A in the event party B defaulted. However, AIG did not have the financial strength to support its many CDS commitments as the crisis progressed and was taken over by the government in September 2008. U.S. taxpayers provided over $180 billion in government support to AIG during 2008 and early 2009, through which the money flowed to various counterparties to CDS transactions, including many large global financial institutions.[84][85]
The limitations of a widely-used financial model also were not properly understood.[86][87] This formula assumed that the price of CDS was correlated with and could predict the correct price of mortgage backed securities. Because it was highly tractable, it rapidly came to be used by a huge percentage of CDO and CDS investors, issuers, and rating agencies.[87] According to one wired.com article[87]: "Then the model fell apart. Cracks started appearing early on, when financial markets began behaving in ways that users of Li's formula hadn't expected. The cracks became full-fledged canyons in 2008—when ruptures in the financial system's foundation swallowed up trillions of dollars and put the survival of the global banking system in serious peril... Li's Gaussian copula formula will go down in history as instrumental in causing the unfathomable losses that brought the world financial system to its knees."
As financial assets became more and more complex, and harder and harder to value, investors were reassured by the fact that both the international bond rating agencies and bank regulators, who came to rely on them, accepted as valid some complex mathematical models which theoretically showed the risks were much smaller than they actually proved to be in practice [88]. George Soros commented that "The super-boom got out of hand when the new products became so complicated that the authorities could no longer calculate the risks and started relying on the risk management methods of the banks themselves. Similarly, the rating agencies relied on the information provided by the originators of synthetic products. It was a shocking abdication of responsibility

Finance evidence

2009-07-01T04:00:00.000-07:00

In addition to easy credit conditions, there is evidence that both government and competitive pressures contributed to an increase in the amount of subprime lending during the years preceding the crisis. Major U.S. investment banks and government sponsored enterprises like Fannie Mae played an important role in the expansion of higher-risk lending.[44][45]
The term subprime refers to the credit quality of particular borrowers, who have weakened credit histories and a greater risk of loan default than prime borrowers.[46] The value of U.S. subprime mortgages was estimated at $1.3 trillion as of March 2007,[47] with over 7.5 million first-lien subprime mortgages outstanding.
Subprime mortgages remained below 10% of all mortgage originations until 2004, when they spiked to nearly 20% and remained there through the 2005-2006 peak of the United States housing bubble.[49] A proximate event to this increase was the April 2004 decision by the SEC to relax the net capital rule, which encouraged the largest five investment banks to dramatically increase their financial leverage and aggressively expand their issuance of mortgage-backed securities. This applied additional competitive pressure to Fannie Mae and Freddie Mac, which further expanded their riskier lending.[50] Subprime mortgage payment delinquency rates remained in the 10-15% range from 1998 to 2006[51], then began to increase rapidly, rising to 25% by early 2008.[52][53]
Some, like American Enterprise Institute fellow Peter J. Wallison[54], believe the roots of the crisis can be traced directly to sub-prime lending by Fannie Mae and Freddie Mac, which are government sponsored entities. On 30 September 1999, The New York Times reported that the Clinton Administration pushed for sub-prime lending: "Fannie Mae, the nation's biggest underwriter of home mortgages, has been under increasing pressure from the Clinton Administration to expand mortgage loans among low and moderate income people...In moving, even tentatively, into this new area of lending, Fannie Mae is taking on significantly more risk, which may not pose any difficulties during flush economic times. But the government-subsidized corporation may run into trouble in an economic downturn, prompting a government rescue similar to that of the savings and loan industry in the 1980s.
In 1995, the administration also tinkered with President Carter's Community Reinvestment Act of 1977 by regulating and strengthening the anti-redlining procedures. The result was a push by the administration for greater investment, by financial institutions, into riskier loans. A 2000 United States Department of the Treasury study of lending trends for 305 cities from 1993 to 1998 showed that $467 billion of mortgage credit poured out of CRA-covered lenders into low and mid level income borrowers and neighborhoods.
Others have pointed out that there were not enough of these loans made to cause a crisis of this magnitude. In an article in Portfolio Magazine, Michael Lewis spoke with one trader who noted that "There weren’t enough Americans with [bad] credit taking out [bad loans] to satisfy investors’ appetite for the end product." Essentially, investment banks and hedge funds used financial innovation to synthesize more loans using derivatives. "They were creating [loans] out of whole cloth. One hundred times over! That’s why the losses are so much greater than the loans.

Interest rates

2009-06-29T19:44:00.000-07:00

foreign currency mortgage is a mortgage which is repayable in a currency other than the currency of the country in which the borrower is a resident. Foreign currency mortgages can be used to finance both personal mortgages and corporate mortgages.
The interest rate charged on a Foreign currency mortgage is based on the interest rates applicable to the currency in which the mortgage is denominated and not the interest rates applicable to the borrower's own domestic currency. Therefore, a Foreign currency mortgage should only be considered when the interest rate on the foreign currency is significantly lower than the borrower can obtain on a mortgage taken out in his or her domestic currency.
Borrowers should bear in mind that ultimately they have a liability to repay the mortgage in another currency and currency exchange rates constantly change. This means that if the borrower's domestic currency was to strengthen against the currency in which the mortgage is denominated, then it would cost the borrower less in domestic currency to fully repay the mortgage. Therefore, in effect, the borrower makes a capital saving.
Conversely, if the exchange rate of borrowers domestic currency were to weaken against the currency in which the mortgage is denominated, then it would cost the borrower more in their domestic currency to repay the mortgage. Therefore, the borrower makes a capital loss.
When the value of the mortgage is large, it may be possible to reduce or limit the risk in the exchange exposure by hedging (see below).
Managed currency mortgages can help to reduce risk exposure. A borrower can allow a specialist currency manager to manage their loan on their behalf (through a limited power of attorney), where the currency manager will switch the borrower's debt in and out of foreign currencies as they change in value against the base currency. A successful currency manager will move the borrower's debt into a currency which subsequently falls in value against the base currency. The manager can then switch the loan back into the base currency (or another weakening currency) at a better exchange rate, thereby reducing the value of the loan. A further benefit of this product is that the currency manager will try to select currencies with a lower interest rate than the base currency, and the borrower therefore can make substantial interest savings.
There are risks associated with these types of mortgages and the borrower must be prepared to accept an (often limited) increase in the value of their debt if there are adverse movements in the currency markets.
A successful currency manager may be able to use the currency markets to pay off a borrower's loan (through a combination of debt reduction and interest rate savings) within the normal lifetime of the loan, while the borrower pays on an interest only basis.

National economic

2009-06-29T19:38:00.000-07:00

Controversy about currency speculators and their effect on currency devaluations and national economies recurs regularly. Nevertheless, economists including Milton Friedman have argued that speculators ultimately are a stabilizing influence on the market and perform the important function of providing a market for hedgers and transferring risk from those people who don't wish to bear it, to those who do.[16] Other economists such as Joseph Stiglitz consider this argument to be based more on politics and a free market philosophy than on economics.[17]
Large hedge funds and other well capitalized "position traders" are the main professional speculators.
Currency speculation is considered a highly suspect activity in many countries.[where?] While investment in traditional financial instruments like bonds or stocks often is considered to contribute positively to economic growth by providing capital, currency speculation does not; according to this view, it is simply gambling that often interferes with economic policy. For example, in 1992, currency speculation forced the Central Bank of Sweden to raise interest rates for a few days to 500% per annum, and later to devalue the krona.[18] Former Malaysian Prime Minister Mahathir Mohamad is one well known proponent of this view. He blamed the devaluation of the Malaysian ringgit in 1997 on George Soros and other speculators.
Gregory J. Millman reports on an opposing view, comparing speculators to "vigilantes" who simply help "enforce" international agreements and anticipate the effects of basic economic "laws" in order to profit.[19]
In this view, countries may develop unsustainable financial bubbles or otherwise mishandle their national economies, and foreign exchange speculators allegedly made the inevitable collapse happen sooner. A relatively quick collapse might even be preferable to continued economic mishandling. Mahathir Mohamad and other critics of speculation are viewed as trying to deflect the blame from themselves for having caused the unsustainable economic conditions. Given that Malaysia recovered quickly after imposing currency controls directly against IMF advice, this view is open to doubt.

Currency Market

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There is no unified or centrally cleared market for the majority of FX trades, and there is very little cross-border regulation. Due to the over-the-counter (OTC) nature of currency markets, there are rather a number of interconnected marketplaces, where different currencies instruments are traded. This implies that there is not a single exchange rate but rather a number of different rates (prices), depending on what bank or market maker is trading, and where it is. In practice the rates are often very close, otherwise they could be exploited by arbitrageurs instantaneously. Due to London's dominance in the market, a particular currency's quoted price is usually the London market price. A joint venture of the Chicago Mercantile Exchange and Reuters, called Fxmarketspace opened in 2007 and aspired but failed to the role of a central market clearing mechanism.
The main trading center is London, but New York, Tokyo, Hong Kong and Singapore are all important centers as well. Banks throughout the world participate. Currency trading happens continuously throughout the day; as the Asian trading session ends, the European session begins, followed by the North American session and then back to the Asian session, excluding weekends.
Fluctuations in exchange rates are usually caused by actual monetary flows as well as by expectations of changes in monetary flows caused by changes in gross domestic product (GDP) growth, inflation (purchasing power parity theory), interest rates (interest rate parity, Domestic Fisher effect, International Fisher effect), budget and trade deficits or surpluses, large cross-border M&A deals and other macroeconomic conditions. Major news is released publicly, often on scheduled dates, so many people have access to the same news at the same time. However, the large banks have an important advantage; they can see their customers' order flow.
Currencies are traded against one another. Each pair of currencies thus constitutes an individual product and is traditionally noted XXX/YYY, where YYY is the ISO 4217 international three-letter code of the currency into which the price of one unit of XXX is expressed (called base currency). For instance, EUR/USD is the price of the euro expressed in US dollars, as in 1 euro = 1.5465 dollar. Out of convention, the first currency in the pair, the base currency, was the stronger currency at the creation of the pair. The second currency, counter currency, was the weaker currency at the creation of the pair.
The factors affecting XXX will affect both XXX/YYY and XXX/ZZZ. This causes positive currency correlation between XXX/YYY and XXX/ZZZ.
On the spot market, according to the BIS study, the most heavily traded products were:
EUR/USD: 27%
USD/JPY: 13%
GBP/USD (also called sterling or cable): 12%
and the US currency was involved in 86.3% of transactions, followed by the euro (37.0%), the yen (17.0%), and sterling (15.0%) (see table). Note that volume percentages should add up to 200%: 100% for all the sellers and 100% for all the buyers.
Trading in the euro has grown considerably since the currency's creation in January 1999, and how long the foreign exchange market will remain dollar-centered is open to debate. Until recently, trading the euro versus a non-European currency ZZZ would have usually involved two trades: EUR/USD and USD/ZZZ. The exception to this is EUR/JPY, which is an established traded currency pair in the interbank spot market. As the dollar's value has eroded during 2008, interest in using the euro as reference currency for prices in commodities (such as oil), as well as a larger component of foreign reserves by banks, has increased dramatically. Transactions in the currencies of commodity-producing countries, such as AUD, NZD, CAD, have also increased

Inter bank

2009-06-29T19:23:00.000-07:00

Unlike a stock market, where all participants have access to the same prices, the foreign exchange market is divided into levels of access. At the top is the inter-bank market, which is made up of the largest investment banking firms. Within the inter-bank market, spreads, which are the difference between the bid and ask prices, are razor sharp and usually unavailable, and not known to players outside the inner circle. The difference between the bid and ask prices widens (from 0-1 pip to 1-2 pips for some currencies such as the EUR). This is due to volume. If a trader can guarantee large numbers of transactions for large amounts, they can demand a smaller difference between the bid and ask price, which is referred to as a better spread. The levels of access that make up the foreign exchange market are determined by the size of the "line" (the amount of money with which they are trading). The top-tier inter-bank market accounts for 53% of all transactions. After that there are usually smaller investment banks, followed by large multi-national corporations (which need to hedge risk and pay employees in different countries), large hedge funds, and even some of the retail FX-metal market makers. According to Galati and Melvin, “Pension funds, insurance companies, mutual funds, and other institutional investors have played an increasingly important role in financial markets in general, and in FX markets in particular, since the early 2000s.” (2004) In addition, he notes, “Hedge funds have grown markedly over the 2001–2004 period in terms of both number and overall size” Central banks also participate in the foreign exchange market to align currencies to their economic needs.

commission calculation

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SWFX marketplace business model+ is based on volume commission. The volume commission rate applies per traded million USD or equivalent amount in another primary currency. The volume commission rate depends on traded volume and size of the account. Following commissions are applied for self trading accounts:
Commission per 1 million USD traded (USD, based on deposit size), as of 15.05.2009
Deposit size
with Dukascopy
with Custodian Banks
> *10 000
36
* Note: Dukascopy announces temporary acceptance of trading deposits for private clients starting from 10.000 USD. This is linked to a number of requests from Dukascopy’s partnerbanks for White Label Program (WLP), which will create a retail network of SWFX in the near future. After launch of the retail WLP project, Dukascopy will come back to its previous policy of initial minimum deposit size.
Commission per 1 million USD traded (USD, based on monthly volume), as of 15.05.2009
Monthly volume
Commission
> 50 millions
18
> 0.5 billions
15
> 1 billions
12
> 2 billions
9
> 3 billions
5
“Deposit size” is calculated as a sum of all deposits minus sum of all withdrawals. Profit and loss is not taken into consideration. “Monthly volume” is traded volume in primary currency converted into USD. All trades on one account are summarized for the period of one calendar month. Commission discount is applied at the end of the month if the traded volume meets the “Monthly volume” discount criteria. In case of discounted rates applicable both on the deposit size and monthly volume basis, the lowest commission of the two should be applied.

Example of commission calculation: the total volume traded during the month equals USD 3,500,000,000 (USD 3.5 billion). The commission will be charged as follows: USD 5 per one million USD traded for the whole USD 3.5 billion traded. Any difference between the commission initially accounted for and the effective amount of commission determined by the volume figure shall be credited to the client's account at the end of the month in consideration.

Commissions for managed accounts may amount to a maximum of USD 100 per USD 1 million traded. If a different fee structure is agreed, the parties will enter into an ad hoc agreement.

Commissions charged on Dukascopy Managed Accounts may constitute up to USD 40 per USD 1 Million traded.
To learn more about Dukascopy Interbank Accounts, please write us: info@dukascopy.com, call us: +41 (0) 22 799 4888 or alternatively ask for a call-back.