International Business Assignment: Credit Default Swaps and Currency

This assignment solution provides a detailed analysis of various aspects of international business. It begins by defining government-sponsored enterprises (GSEs) and their role in the American economy, using examples like Freddie Mac and Fannie Mae. The solution then explains long and short positions in financial markets, including naked and covered short selling, and discusses the legality of naked short selling. It also covers countries that have banned naked short selling and the reasons behind it, followed by an explanation of short squeezes. Furthermore, the assignment explores credit default swaps (CDS), their value during the 2008 financial crisis, and their percentage relative to global and U.S. GDP. The solution concludes by discussing the currency of choice for oil trading and the continued dominance of the U.S. dollar in international transactions despite economic challenges. The assignment references several academic papers to support its claims.

Running head: INTERNATIONAL BUSINESS
International Business
Name of Student
Name of the University
Author Note

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INTERNATIONAL BUSINESS

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INTERNATIONAL BUSINESS
Table of Contents
Answer to Question 1.................................................................................................................3
Answer to question 2..................................................................................................................3
Answer to question 3..................................................................................................................4
Answer to question 4..................................................................................................................5
Answer to question 5..................................................................................................................5
Answer to question 6..................................................................................................................6
Answer to question 7..................................................................................................................6
References..................................................................................................................................7

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Answer to Question 1
A government-sponsored enterprise (GSE) is an organization in the private sector that
is backed by the government (Beber & Pagano 2013). This organization were built to
improve the flow of loan credit to particular segments of the American economy. Formed by
actions of Congress, these entity, though privately detained, deliver public financial facilities.
GSEs assist to enable borrowing for entire types of individuals, from scholars to farmers to
proprietors.
For instance, Federal Home Loan Mortgage Corporation (Freddie Mac) was initially
formed as a GSE in the real estate sector to inspire house proprietorship among the medium
class and employed class. Another hypothecation GSEs, as they are known, comprise Federal
National Mortgage Association (Fannie Mae) and Government National Mortgage
Association (Ginnie Mae), that were announced to increase the flow of loan advancing in the
real estate market, while also decreasing the cost of that taking loan from any of the
institution mentioned above (Brunnermeier, & Oehmke, 2013).
Answer to question 2
Part (a)
A long position is the purchasing of an asset or security such as a stock, commodity or
currency with the anticipation that the security will upswing in price.
Part (b)

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A short, or a short position, is formed when a dealer or stock market trader sells a stock class
such commodity, currency with the objective of buying it again in the future at a diminished
value.
Part (c)
There are two categories of short positions which are naked and covered. A naked
short position is when a stock holder sells a stock without having ownership of it. Though,
that exercise is illegitimate or banned in the U.S. for equities. A covered short is a position in
the stock market when a security trader borrows the equities from a stock loan division; in
return, the trader reimburse a buying-rate during the time the short holding is in hand.
Part (d)
The retail investor or a trader is not permitted to trade a naked short stock, this is under illegal
and unlawful practice in the U.S.A.
Part (e)
Naked shorting of share is consider as an illegal practice in the USA, Regardless of
being made illegitimate after the 2008-09 economic disaster, naked shorting of share remain
to occur due to the ambiguities in rules and inconsistencies among paper and electronic
trading classifications.
Answer to question 3
Part (a)

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Apart from the USA, some others countries like Germany, USA and UK and the other
countries respectively have banned the naked short selling of the stock.
Part (b)
Almost major nation has banned the trading naked short selling in the market, but
some of the countries like Russia, Japan, France and Asian countries had practiced this for
some time in the financial system .Most economists and investors have faith in short selling
because they believe it is as an significant portion of the worth discovery procedure and
highlight defects in business fundamentals, which directs significant indications into the
market.
Answer to question 4
A short squeeze is a stock market functionality that shows a rise in a stock's value,
compelling a huge magnitude of short sellers to close their holding, which in result impulses
the value even upward. When a stockholder shorts a security, they rent a securities from other
account and sells them, confirming to substitute the stock at a future date (Engelberg, Reed,
& Ringgenberg, 2018).
Answer to question 5
Part (a)

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The outstanding credit default swaps worth at $62.2 trillion. For the duration of the financial
crisis of 2008, the worth of CDS was hit tough, and it fall to $26.3 trillion by 2010 and $25.5
trillion in 2012.
Part (b)
The world GDP in the USA is 14.32 trillion USD and the world GDP is 63.46 trillion USD.
The outstanding credit default swap percentage with the world and USA GDP 26.3 /
77.78*100 = 33.81%
Answer to question 6
Part (a)
Oil is traded in the US dollar
Part (b)
Credit default swap is traded in the domestic currency where the organization is currently
doing its business or they are traded in the global foreign currency that are most liquid.
Answer to question 7
Part (a)
Yes, dollar remains the currency of choice for transaction for most of the nation in the world
despite of economic crisis faced by the USD in the 2007-08. This is because the dollar has
been able to recover its position immediately after the crisis and prove to stable currency.
Part (b)

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Till date no major nation have called to switch from the US dollar to any other currency ijn
the world.
References
Beber, A., & Pagano, M. (2013). Short‐selling bans around the world: Evidence from the
2007–09 crisis. The Journal of Finance, 68(1), 343-381.
Brunnermeier, M. K., & Oehmke, M. (2013). Predatory short selling. Review of
Finance, 18(6), 2153-2195.
Devos, E., McInish, T., McKenzie, M., & Upson, J. (2014). Naked Short Selling and the
Market Impact of Fails-to-Deliver: Evidence from the Trading of Real Estate
Investment Trusts. The Journal of Real Estate Finance and Economics, 49(4), 454-
476.
Engelberg, J. E., Reed, A. V., & Ringgenberg, M. C. (2018). Short‐selling risk. The Journal
of Finance, 73(2), 755-786.
Fang, V. W., Huang, A. H., & Karpoff, J. M. (2016). Short selling and earnings management:
A controlled experiment. The Journal of Finance, 71(3), 1251-1294.
Kolasinski, A. C., Reed, A., & Thornock, J. R. (2013). Can short restrictions actually increase
informed short selling?. Financial Management, 42(1), 155-181.

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Reed, A. V. (2013). Short selling. Annu. Rev. Financ. Econ., 5(1), 245-258.