In the past month, at global level, we were witnessing major declines and volatilities at stock markets and financial markets as noted for the last time during the big financial crisis 2008-09. While back at those times, the largest “culprits” for the occurred crisis were the financial institutions, this time the mayor factor is quite untypical. The newly occurred situation is a result of the high exponential spreading of the respiratory Corona virus (aka COVID 19) from China to Europe, and eventually in the USA. At the moment, infected are residents of around 150 countries around the world. Currently, its spreading is the highest threat for the world economy and global financial markets.
Because of such development of the situation, the WHO reached a decision to declare a state of global pandemic.
With the virus COVID19, which was detected for a first time at the beginning of January in the city of Wuhan (part of the prefecture Hubei) in China, until March 11, 2020 infected were 81.250 Chinese, and 3.253 passed away (mainly citizens of Wuhan). Right when at the end of February, the Chinese authorities managed to localize the virus spreading, it begun to spread massively through Europe, mostly in Italy and Spain, while at the moment USA and Italy are exceeding China per number of infected citizens. The statistics from Italy are terrifying, where the number of the deceased reached extreme 10.779, and almost identical is the situation in Spain. Neither the Balkan Peninsula, including our state, remained immune to this virus. Still, the number of the affected and deceased is quite smaller than the above mentioned regions.
The emergence of the virus which rapidly spread all around the world over night has brought the world economies in recession. By definition, according to the traditional measuring, not a single economy has registered GDP decline, but the reality is that almost all developed economies are in deep recession already. Decline of the economic activity around the world is compared to the one of the high depression in the 30-ies of the last century. Following the initial shock from the virus and the extreme increase of infected persons, most of the countries in the past period were noting decrease in the of number of the newly infected, and thus the world would begin to return to normal, counting the losses.
Spreading of the virus, fear, measures for social distancing, limiting of movement, border closing and similar, had initially been mirrored in stock indices decline around the world and then in the global economic activity. Since the beginning of the crisis, the losses at the world stock indices went in negative figures ranging from 25 to 30 percents.
Businesses that in their regular operation have import-export relations with foreign companies are exposed to currency risk permanently – risk against change of exchange rate, before all, due to extreme volatility of FX market.
Scope of the FX market is at the historically highest level and is incomparable with the scope of the remaining market instruments (stocks, corporate bonds shares etc.). High scope of trading is also resulting in high volatility of the FX market under terms of market uncertainty.
Change of prices at the foreign market may have significant influence over the cash flows of companies whose businesses are import-export dependable. Under circumstances when the businesses have liabilities or receivables in foreign currency to become due in near time or planned investments for which assets are to be allocated in near future, it is of extreme importance for the companies to mitigate the currency risk and protect against losses on the account of exchange rate differences. FX Forward, i.e. spot FX transaction is used as an extremely flexible instrument for dealing with the currency risk. Continue reading “FX Forwards and their application- magazine Economy and Business”
For almost all of the banks which were researched in the G-10 countries group, the minimum exposure that the banks face in their individual transactions (regardless if these are spot or forward transactions), time duration of Status I lasts from one to two working days. This time duration of Status I relate when all the currencies are traded with, except Japanese Yens. Time duration of Status I in trading with Japanese Yens lasts up to three working days, counting from the day when the FEYCS members can sent irrevocable instructions for paying with Yens in the Japanese payment system .
As supplement to this, time duration of financial transactions settlement is continued for additional one to two working days (time duration of Status U). As a result of the previously said, it would take more than three working days (if holidays and weekend occur between these three working days, the days would be much more) from the beginning of risk emergence that the banks are facing in its operation, containing in it the time necessary for complete transaction processing.
Seeing from the view point of the banks, with the settlement of purchased currencies before the settlement of currencies that were sold, they may face risk of not being able to cancel the currency they sell. In such cases, they are forced to pay out the currency they sold, even in cases when it is clear that they will not get the currency they agreed to. This case occurs mainly when transactions are concluded in zones of huge time difference. It is best to use settlement system, which could make settlement of two currencies simultaneously . Continue reading “Time duration of transactions settlement- magazine Economy and Business”