Report On Interest Rate Derivative & Their Role In Global Market

Added on -2020-02-05

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Transnational Commercial Law
TABLE OF CONTENTSINTRODUCTION...........................................................................................................................1TASK 1............................................................................................................................................1Functions of interest rate derivative and their role in the global economy............................1TASK 2Various international payment methods available for international trade or transaction.......5CONCLUSION................................................................................................................................8REFERENCES................................................................................................................................9
INTRODUCTION Transnational or international commercial law refers to the set of rules, conventions,legislation as well as commercial customs or usage. International commercial law governs allviable transactions which take place at international level. Business dealings in which more thantwo countries are involved are known as international transaction. It is also termed as trade orbusiness law because it also regulates the areas which are related with the business practices.Transnational commercial law governs contracts made by an organization, customer credit,house loan as well as other secured transactions (VerSteeg, 2015). The present report willdevelop the understanding about interest rate derivative and the role which they play in theglobal market. Besides this, it will also discuss the rules and regulations which are framed byEuropean Union competition law. Further, the present report will examine the variousinternational payment methods which are available to Tina on the basis of case scenario. Inaddition to this, this project also helps in understand the international rules which are applied tosuch payment methods.TASK 1Functions of interest rate derivative and their role in the global economy Interest rate derivative may be defined as a derivative tool which offers hedge toinvestors or bank in against to the changes in interest rates. Usually, investors undertake interestrate derivative as a speculative tool which helps them in generating huge amount of profit bymaking estimation about interest rate. By analyzing market trend or patter, investor can easilymake profit through the appropriate estimation of interest rate changes. Interest rate derivative isthe largest and growing derivative market in the world. According to the International swap andderivative association, 80% of the top companies make use of interest rate derivative to controltheir cash flows.Interest rate swap is the most common type of interest rate derivative which provideshedge to investors in relation to interest rate fluctuations. Usually two parties are involved ininterest rate derivatives (Mele, Obayashi and Shalen, 2015). In this, one party possesses fixedinterest rate derivatives whereas another party has floating interest rate derivatives. In order toreduce the risk of interest rate fluctuations, party who is having the floating interest rateinstrument makes exchange of their securities with the fixed interest rate instruments. Throughthis, party is able to hedge in against to the interest are fluctuations. Thus, in interest rate swap,1
two parties have to exchange their interest rate cash flows on the basis of specific notionalamount. In this, one party move from fixed interest rate to floating interest rate whereas anotherparty take decision to move from floating to fixed interest rate with the specific notional amountfor the predetermined time period (Park, 2015). Through this, one counter party is able to makeprofit on the basis of his or her estimation. Whereas another secures himself with the risk ofinterest rate fluctuations who select fixed interest rate over the floating interest rate.For instance: There are two counter parties such as A and B, who are involved in interestrate derivative. In this, A has invested £50000 @ 8% fixed interest rate. Whereas B has investedhis money in the market @ 8% floating interest rate. By analyzing the market trend, B threatenedfrom the interest rate fluctuation which will take place in the near future. In contrary to this, Aassumes that market will grow in the near future but he has invested his money in the fixedinterest rate instrument. Thus, both the counter parties having similar principle or notionalamount upon which they agree to exchange their interest rates. Besides this, both the parties wantto exchange their cash flows through the financial intermediary such as bank. Thus, with the aimto increase profit margin and hedge, A and B have decided to exchange their cash flow for theperiod of 5 years. For such exchange of cash flows, bank charges exchange cost which alsoimposes financial cost in front of both the counter parties. In this, A receives floating rate andthereby paid fixed rate to B. On contrary to this, by exchanging the cash flows B receives fixedrate whereas make payment to B at floating rate. It enables A to increase his profitability aspectsby taking risk. Whereas such interest swap have offered hedge to B in against to the risk of lossdue to the interest rate fluctuations. Functions of interest rate derivativesInterest rate derivative provide hedging to the investors by protecting them from theinterest rate fluctuations. It is hedging instrument that offers safe kind of return toinvestors. It offers fixed return to the counter party who selects fixed interest rateinstrument over the floating rate instruments (Fernández, 2015). In this, both the partiesexchange their interest rates without exchanging the underlying debt.Besides this, interest rate derivative is also the investment tool that provides opportunityto maximize their return by making investment in the floating rate instruments. Throughthis, individual is able to earn high profitability by undertaking the risk. 2

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