University Finance: Financial Markets and Instruments Case Study

This case study delves into the global phenomenon of currency wars, using Brazil as a key example to illustrate modern currency valuation and its impact on financial markets. It examines the effects of competitive devaluation and the interaction between the Brazilian real and other global currencies. The study explores the causes, including expansionary monetary policies and the US dollar's influence, and the instruments involved, such as derivatives and swaps, alongside their consequences on international trade and economic growth. The analysis covers policy divergences, the role of the US dollar, and the instruments utilized to manage currency fluctuations. The case study highlights how currency wars influence exports, imports, and investment, ultimately affecting a country's economic standing and financial market dynamics.

Running head: FINANCIAL MARKETS AND INSTRUMENTS
Financial markets and instruments
Name of the Student
Name of the University
Authors note

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Executive summary:
The above case study deals with the global impact of the currency war which had
been imposed by Brazil to describe the modern currency valuation. Apart from this the study
deals with the impact on the financial market of currency war and how it had affected the
transaction of Brazilian real with the other global currency as well as the financial impact.

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Table of Contents
Section 1: Introduction...................................................................................................4
Location:....................................................................................................................4
The location used for the case study is Brazil............................................................4
Currency:....................................................................................................................4
Date:...........................................................................................................................4
Section 2: Case:..............................................................................................................4
Main causes of the case:.............................................................................................6
Main instruments to the case:.....................................................................................8
Consequences of the case:........................................................................................10
References:...................................................................................................................15

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Section 1: Introduction:
The above case study deals with the currency wars which have been considered as a
global phenomenon in the world. Since it is a modern day phenomenon therefore it requires
high observation and good commitment towards the cause. Hence it is been considered as an
international aspect. Apart from this almost all the countries have faced these types of cases
every time and the impact it had over the global financial market. The study deals with the
importance of currency war, how it has impacted over the business along with a suitable
conclusion at the end.
Location:
The location used for the case study is Brazil.
Currency:
The currency used in Brazil is real.
Date:
The currency war occurred in Brazil in the year 2006.
Section 2:Case:
Currency war occurs when a countries central bank uses expanding monitory policies to
deliberately down the value of the nation’s money. Hence this strategy is also called
competitive devaluation. This phrase has been coined by the finance e minister of Brazil
GuidoManteca. The currency war has been used to define the competition between china,
japan and United States to have a lower currency value. However Brazil had been suffering
from the high currency value which had a huge impact on the economic growth of the
country. Apart from this the study deals with the countries engage over the currency wars to
have some competitive advantage over it in international trading. When they degrade the

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value of the currencies they make less exports than the international markets. Business
exports more become profitable and could create new jobs. Thus as a result the countries get
benefits from the company’s economic growth. The currency wars have encouraged to invest
in the national assets. The stock market becomes less expensive to the foreign investment
increases as business of the countries becomes relatively cheaper and hence the foreign
companies may also buy the natural resources. The exchange rates measures the value of the
country’s currency versus other currencies. Hence a countries currency wars deliberately
lowers the value. Hence the countries value with the fixed interest rate will be added to this
case. Hence most of the countries will be making the changes to the company interest
rates.To the global US dollars because of being a reserve currency. However most of the
countries have flexibility in the interest rate and they must increase the money supply to
lower the currency value since the supply is more than the demand value of the currency.
Therefore a central bank have many tools to increase the money supply by expansion of the
credit. Hence it does thus by lowering the interest rate. It can also be adding credit to the
national bank reserves. This is called as the open market operations or quantitative easing.
Apart from this a countries government could also influence the currency value with the
expansionary fiscal policy. It does this by spreading more business or cutting taxes for the
exports and imports. But in most of the time there has been a political reason behind this and
it does not account for effects in the currency war.
Apart from this the currency depreciation may be not necessarily in the nation’s best
interest, a weak domestic currency makes a huge impact over the exports of the nation’s
currency and simultaneously makes them expensive. Higher export volume makes
improvement in the company’s requirement growth. Hence the pricing imports are also
having the same kind of effect since the consumers opt for the local alternatives to the
imported products. Thus improvements in the terms of trade generally ply’s into a lower

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current account deficit, higher employment and faster GDP growth. Thus simulative
monitory policies usually results a weak. Apart from this there is also a positive impact on the
national capital and housing markets, which in turn could boost up the domestic consumption
through the wealth effect that have been implemented in the currency wars
Rise in the US dollar: When the Brazilian minister warned back in the month of September
2010, he had refereed that the growing changes in the foreign exchange markets sparked by
the US federal reserve easing programmes which had been weaken towards the weaken dollar
value, thus china had continued degradation in the Yuan and it stopped the Asian banks to
intervene in the foreign markets. Accidentally the US dollar has been accepted against almost
all the major currencies since in the beginning of 2011, with the trade weighted dollar value
of the country. Hence the changes in the index value is trading in the higher level more than
the decade. Thu every major currency value has been decreased against the dollar value over
the past year. With respect to the changes in the euro value and the exchange rate on the
Brazilian real went down more than 20% over the period.
Main causes of the case:
Brazil has been facing the full heat of the currency devaluation and it was the
Brazilian minister who had invented the term currency war to describe the recent
phenomenon. The report generated from merco press, Uruguay had focused on delivering
news related to the member’s countries of the Mercosur which provides the Brazilian
perspectives on these departments. However Brazil won’t allow the currency in real to
appreciate excessively as other countries weaken their currencies to gain the market share for
the exporters which is considered as a main issue addressed by the Brazilian finance ministry
on 25thSeptember, 2010 in Sao Paulo. Hence the main issue behind using this case is to
devaluate the currencies in the global economy. As per the fiancé ministry a weaker exchange

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rate makes the countries exports rate cheaper thus by helping to boost the economy of the
country in time of global downtown. However the problem is when the policy changes which
makes things difficult to coordinate. The exchange rate could gain some advantage over the
issue globally. Hence in real terms there has been some gain over the value as exchanged by
over a third against the US dollar since the beginning of 2009, thus making the Brazilian
exports more expensive in dollar terms and cutting into profits for exporters. The commits
echoed Mantegna’s words as on 15th September when he pledged that Brazil is not going to
lose any phrase. The Brazilian government has an arsenal if instruments to cope with the
situation and will not let the case to strengthen the case much more or less suffer harming
effects from the other countries exchange rate policies.
The US dollar policy: The US dollar economy have witnessed the effects of the strong
dollar concept without facing too many problems in that area, although one notable issue
could be the substantial number of American big organizations which could have make an
impact over the strong dollar changes in the financial market. However the US dollar have
generally pursued the strong dollar concept by varying the degrees to the success over the
years. However the US situation is a very unique making the sense that it is the world’s
largest economy by nature . And the US currency being the global currency. Thus the
changes in the currency value may implement some changes in the market value of the
country.
Policy divergence: Since the currency war have impacted all over the world economy and by
far it had also impacted over the economy of brazil , thus the exchange rate between the
Brazilian real and the US global currency has been changed drastically. Apart from this the
US benchmark federal rates as on 2015 have increased since 2006. However for the rest of
the world, which is going towards easier monitory policies. Hence the divergence in the
monitory policy is the major cause behind the currency war between the countries that have

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been applying for change . Hence the situation has been exercised by different changes in the
policy-
1. Change in the economic policy.
2. Exhausting of the stimulus growth of the policy and it has been implemented by most
of the nations.
3. Sovereigns bonds yield value is also triggered as thee changes in the monitory policy
of the Brazilian currency. As per the reports published by the UN consulate it is see
that the bond yield value has been 1.86% in the year 2010 and it had increased to
2.52% in the next 30 years because the demand for the dollar value had been
increased over the last 30 years calculated on 2017 and thus the prices of the products
have been increased.
Main instruments to the case:
The main instruments related to this case study are currency,derivatives, exchange
rate and swaps. These are some important measurements of this case. However the currency,
derivatives etc. plays a crucial role in the market. Apart from this the changes in the currency
rates or sudden increase or decrease in the currency value could have impacted on the
currency rates and also changes happen in the current economic standard.
Derivatives: these are the securities whose values are determined by the companies
underlying assets where it is based. Thus the underlying assets determines the price in which
the changes can happen. Considering some examples of derivatives are futures, forwards
options and swaps. The main purpose of these securities are to give the producers and
manufacturers the possibility to hedge risks. Thus by using derivatives will be the type of
underlying assets and markets will be traded. Hence it is essential to understand the strengths
and weakness of derivatives into the market. Similarly for Brazil also the changes in the

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derivative value could play an important role in defining the current market and economic
situations as well as to the transactions in foreign currencies with the Brazilian real. Thus it
will effect on the current market performance of the companies doing business out there.
Foreword: these are very similar as they are contracts which give access to the community at
a determined price and time in the future. A foreword distinguish itself from a future which
has been traded between two parties directly by using the exchange. The absence of these
results brings changes in the terms and size of the contracts. Thus in contrary to the future
forwards are usually been executed to the maturity because of in most of the cases they use
insurance against adverse pricing movement and the actual delivery of the commodities takes
place. Whereas the futures are to be widely employed by the speculators who hope to gain
profit by selling the contracts at the higher price and the futures are been seen close to the
maturity.
Swap: it is the agreement between two parties to exchange cash flows on a determined date
or in many cases multiple dates . Typically on party agrees to pay a floating rate while the
other party pays a fixedrate. Considering an example when trading commodities the first
party a real estate company relying in the raw materials, agrees to pay a fixed price at the pre-
determined quantity for the commodity. The other party a bank agrees to pay the spot price to
the commodity. Hereby the real estate industry is insured to pay for the commodity. A rise in
the price of the commodity is in the cash which is paid by the bank. Though the price should
fall below the differences will be paid to the bank. Similarly for this case study it is seen that
the due to increase in the products the export price have also increased. Thus the currency
war have situated between different countries since they have been considered as an
important factor and thus they have been putting some changes over the financial market .

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it is an agreement between two parties to exchange cash flows on a determined price
date or in many cases in the multiple dates. Typically one parties agrees to pay the interest in
fixed rate while the other parties pays in floating rate. For example when trading
commodities, the first parties are relying on the kerosene agrees to pay in the fixed rate or at a
pre determined price of the commodity. However the other party could agree to pay in the
spot price for the commodity. Thus the real estate industry is insured at a price which will pay
for the commodity. A rise in the price of the commodity in this case has been paid by the
bank. Thus the price will change and the difference will be paid to the bank.
Consequences of the case:
changes of the currency wars in which the countries devalue their currencies to gain a
trade advantage , some dominated headlines last week ahead of the weekend meetings in the
South Korea of the finance leading ministries which make up the group 20(G20). The US
treasury secretory who had presided over the meeting had addressed that the US desires a
current change in the Chinese currency are rough in the alignment now. Thus a suggestion is
provided that there no need to fall down the dollar value while accommodating the slide.
Hence it is noted that the dollar value had been reduced to 13% over the major currencies
since the month of June. Last week the dollar increased for the first time in six weeks.
Brazil's finance minister warned of "an international currency war" and called for "some kind
of currency agreement." India's prime minister has expressed similar concerns and the
governor of the Bank of England has warned of the same thing regarding the G 20 measures
in Seoul, it is unlikely that there will be any globally coordinated move on exchange rates.
Despite the implements of the currency war will likely to end up in the mid of the month ,
hence many companies have accused of the changes which have been replicated over the
issues relating to the substantial growth.(Ramiro et al., 2017).

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In the united states a weaker dollar value have its own global importance and it have
its use over its own purchasing power and the federal reserve banks seek to destroy the
demand valuation and it has posed its effect towards the destruction related to the currency
war,but increasingly the market value had changed and it had reduced to the global
phenomenon despite the competitiveness of the market players which could create a bug
change in the ongoing currency demand and hence the market capital had been increasingly
pours into the borders. Hence the ongoing currency war could implement mainly three
consequences namely-
1. A global currency agreement:
It is stated that previously it had been globally been coordinated to move the exchange
rate value unlikely. Thus the framework will be suggested by the finance ministers of the
world with an agreement on the changes appointed to the global economy based on the
currency wars. Hence the other countries like US, japan , Germany and France the
governments agreed to intervene to devaluate the US dollar against the Japanese yen or the
Brazilian real (McKinnon & Liu 2013).
This devaluation was planned, in a predetermined d which had stopped the financial
crisis from occurring currency war. During that period of time there had been an immense
response over the dramatic change which had impacted over the monitory policy. Thus the
Federal Reserve had imposed the changes towards rampant inflation. (Chey, 2013). Hence
the changes in the situation could oppose for today in an unique circumstances which had
lead the changes towards the process. However the emerging markets have counted over the
changes in the last percentage towards the prevailing circumstances. Thus the large
percentage of the voting rights play an important role in the monitory fund towards the global
economy.

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more monitory stimulus around the world:
it seems to be most likely outcome in the recent weeks where a number of countries
have already taken steps towards more stimulus as they follows the lead of the United States
since they transact in the global currency however both the banks of japan and bank of
England have moved towards the additional quantitive easing as because thus increases the
quantity of the money in an effort to lower the value of the currency to gain boost. Hence
nearly all the major global banks are contemplating the similar actions. Even the bank of
Canada who is the first major banks that began to withdraw the stimulus with rates high and
began to witness the past summer is likely to put a halt in the actions. However there are
likely to be some expectations among the emerging markets with more than 20 central banks
are raising rates with more issue in the domestic inflation. With that said the inflation rate in
Brazil will be considered and thus it had made an impact over the normal currency rate
changes in the business (Gros 2015). Thus for country like Brazil, the changes in the inflation
rate into the local currency is another way to slower the inflation rate as it keeps a lid in the
prices of the imported goods (Cohen & Benney, 2014).
2. Emerging markets try to close the doors :
The pressure on some emerging markets countries to follow up the suit to reduce the
strength of the currencies may lead to the long term risks of bubbles becoming inflated due to
some extensive stimulus from the domestic actions in additions to inflows from abroad
(Pugliatti 2016). Hence this is prompting to some emerging markets countries to impose
controls to cross borders flows of capital to weaken out the changes in their respective
currencies. However for brazil they have the highest rate of interest in the G 20 summit that is
seeking to restrain thee currencies as investors seeking higher yield in the interest changes in
the business to the emerging markets as amid to the near zero interest rate in the united states

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japan and Europe(Yazigi 2014). Hence the Brazilians first attempt to stem the currency gains
via tax o inflows which had been outflanked by an announcement made by the bank of japan
in reducing the target range of zero to 0.1% the lower since 2006 (Eichengreen 2013). Apart
from this South Korea is also preparing the further measures to counter the capital inflows
triggered by the lower interest rates overseas such as reviving the withholding tax on the
foreign investors, bond holdings, and it may impose some further limits in the currency
forward impact moving. Apart from this the central bank of Indonesia have addressed that the
bank is planning to deposit rates with no longer maturities of three, six and nine months to
slow down the flow of “ hot money” in and out of the country (Prasad 2017) . Also in
Thailand a withholding tax of 15% on the foreign bind has been approved in the foreign
exchange bond holdings. Since most of the study is related to the foreign exchanged value,
thus the full importance is provided in the foreign exchange. Apart from this the currency war
have made an impact over the global financial market and thus there has been imposed of
change in the business throughout the financial year (Cohen & Benney 2014). Thus there are
a lot of implications in the global financial market due to the changes war. These are –
The term is used to speak about the exchange rates and monitory policy used by the
governments to carry out political changes to carry out the political economic wars. This is
used in 2009 and 2010 by the Brazilian government in response to the appreciation of the real
due to the inflow of American capital (Johnson 2016).
1. The US dollar will soon be equal to zero:
As per the Brazilian finance ministry the question is on whether the French benefit
will impose the changes in the from such a shift as well as the changes in the valuation of the
currency between euro and real (Coates 2017). The euro was considered as a reference for the

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international monitory system. However these changes began to enforce the criteria for a
week dollar.Thus in addition to this the euro value has remained strong in the large part of the
business due to the inability to degrade the agreement where the demand was less. Thus it
will be a good for the French exporters to become more competitively priced. Thus the key is
to know if there is any French exporters to make the competitive study (Ming, 2015) .
2. Currency as the weapon:
The downfall of the Russian currency reduces the use of the currency as a weapon tot
to change the political power. (Bernanke 2016). Thus the Russian economy found itself
caught between the international sanctions and a slump lead to the price of goods which
could have increased the prices. (Evenett, 2013). It is the responsibility of the Russian prime
minister to lower down the goods prices and increase the demands of goods of products. In
such a case the foreign business will find themselves under profited and forces to make some
strategic improvement. For example apple suspended products sales in Russia due to the
political issue. Hence it is seen that the currency war has been having a great effect towards
the recent financial crisis as well as they have a lot of impact over the products valuation in te
international market.

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