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Thursday, April 26, 2012

In finance, a currency swap (more typically termed a cross-currency swap, XCS) is an interest rate derivative (IRD). In particular it is a linear IRD, and one of the most liquid benchmark products spanning multiple currencies simultaneously. Currency swap has pricing associations with interest rate swaps (IRSs), foreign exchange (FX) rates, and FX swaps (FXSs).

In finance, a foreign exchange swap, forex swap, or FX swap is a simultaneous purchase and sale of identical amounts of one currency for another with two different value dates (normally spot to forward) and may use foreign exchange derivatives. An FX swap allows sums of a certain currency to be used to fund charges designated in another currency without acquiring foreign exchange risk. It permits companies that have funds in different currencies to manage them efficiently.

A foreign exchange swap has two legs - a spot transaction and a forward transaction - that are executed simultaneously for the same quantity, and therefore offset each other. Forward foreign exchange transactions occur if both companies have a currency the other needs. It prevents negative foreign exchange risk for either party. Foreign exchange spot transactions are similar to forward foreign exchange transactions in terms of how they are agreed upon; however, they are planned for a specific date in the very near future, usually within the same week. It is also common to trade "forward-forward" transactions, where the first leg is not a spot transaction, but already a forward date.

In finance, an interest rate derivative (IRD) is a derivative whose payments are determined through calculation techniques where the underlying benchmark product is an interest rate, or set of different interest rates. There are a multitude of different interest rate indices that can be used in this definition. IRDs are popular with all financial market participants given the need for almost any area of finance to either hedge or speculate on the movement of interest rates. The most basic subclassification of interest rate derivatives (IRDs) is to define linear and non-linear. Further classification of the above is then made to define vanilla (or standard) IRDs and exotic IRDs; see exotic derivative.

Linear IRDs are those whose net present values (PVs) are overwhelmingly (although not necessarily entirely) dictated by and undergo changes approximately proportional to the one-to-one movement of the underlying interest rate index. Examples of linear IRDs are; interest rate swaps (IRSs), forward rate agreements (FRAs), zero coupon swaps (ZCSs), cross-currency basis swaps (XCSs) and single currency basis swaps (SBSs).

Non-linear IRDs form the set of remaining products. Those whose PVs are commonly dictated by more than the one-to-one movement of the underlying interest rate index. Examples of non-linear IRDs are; swaptions, interest rate caps and floors and constant maturity swaps (CMSs). These products' PVs are reliant upon volatility so their pricing is often more complex as is the nature of their risk management.

Devaluation Risks - X ..

Current Account

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The current account records a nation's transactions with the rest of the world—specifically its net trade in goods and services, its net earnings on cross-border investments, and its net transfer payments—over a defined period of time, such as a year or a quarter.

The current account is one half of the balance of payments, the other half being the capital account. While the capital account measures cross-border investments in financial instruments and changes in central bank reserves, the current account measures imports and exports of goods and services, payments to foreign holders of a country's investments, payments received from investments abroad, and transfers such as foreign aid and remittances. Some countries will split the capital account into two top-level divisions (i.e., the financial account and the capital account). In this context, the financial account measures increases or decreases in international ownership of assets, while the capital account measures financial transactions that do not affect income, production, or savings.

According to Trading Economics, the quarter two 2019 current account of the United States was $-128.2 billion.

Key Points:

The current account represents a country's imports and exports of goods and services, payments made to foreign investors, and transfers such as foreign aid.
The current account may be positive (a surplus) or negative (a deficit); positive means the country is a net exporter and negative means it is a net importer of goods and services.
A country's current account balance, whether positive or negative, will be equal but opposite to its capital account balance.
The United States has a significant deficit in its current account.

List of countries by current account balance w

List of countries by current account balance as a percentage of GDP w

Wednesday, April 25, 2012

> Deglobalization >>

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The IS–LM model, or Hicks–Hansen model, is a two-dimensional macroeconomic model which is used as a pedagogical tool in macroeconomic teaching.
Today, the IS–LM model is generally accepted as being imperfect and is largely absent from teaching at advanced economic levels and from macroeconomic research, but it is still an important pedagogical introductory tool in most undergraduate macroeconomics textbooks.

The IS–LM model simplifies the relationship between interest rates and output in the short run in a closed economy (autarky). The intersection of the "investment–saving" (IS) and "liquidity preference–money supply" (LM) curves illustrates a "general equilibrium" where supposed simultaneous equilibria occur in both the goods and the money markets.

The IS–LM model shows the importance of various demand shocks (including the effects of monetary policy and fiscal policy) on output and consequently offers an explanation of changes in national income in the short run when prices are fixed or sticky. Hence, the model can be used as a tool to suggest potential levels for appropriate stabilisation policies. It is also used as a building block for the demand side of the economy in more comprehensive models like the AD–AS model.

The AD–AS or aggregate demand–aggregate supply model (also known as the aggregate supply–aggregate demand or AS–AD model) is a widely used macroeconomic model that explains short-run and long-run economic changes through the relationship of aggregate demand (AD) and aggregate supply (AS) in a diagram. It coexists in an older and static version depicting the two variables output and price level, and in a newer dynamic version showing output and inflation (i.e. the change in the price level over time, which is usually of more direct interest).

The AD–AS model was invented around 1950 and became one of the primary simplified representations of macroeconomic issues toward the end of the 1970s when inflation became an important political issue. From around 2000 the modified version of a dynamic AD–AS model, incorporating contemporary monetary policy strategies focusing on inflation targeting and using the interest rate as a primary policy instrument, was developed, gradually superseding the traditional static model version in university-level economics textbooks.

The dynamic AD–AS model can be viewed as a simplified version of the more advanced and complex dynamic stochastic general equilibrium (DSGE) models which are state-of-the-art models used by central banks and other organizations to analyze economic fluctuations. Unlike DSGE models, the dynamic AD–AS model does not provide a microeconomic foundation in the form of optimizing firms and households, but the macroeconomic relationships ultimately posited by the optimizing models are similar to those emerging from the modern-version AD–AS model. At the same time, the latter is much simpler and consequently more easily accessible for students, making it a widespread tool for teaching purposes.

The Mundell–Fleming model, also known as the IS-LM-BoP model (or IS-LM-BP model), is an economic model first set forth (independently) by Robert Mundell and Marcus Fleming. The model is an extension of the IS–LM model. Whereas the traditional IS-LM model deals with economy under autarky (or a closed economy), the Mundell–Fleming model describes a small open economy.

The Mundell–Fleming model portrays the short-run relationship between an economy's nominal exchange rate, interest rate, and output (in contrast to the closed-economy IS-LM model, which focuses only on the relationship between the interest rate and output). The Mundell–Fleming model has been used to argue that an economy cannot simultaneously maintain a fixed exchange rate, free capital movement, and an independent monetary policy. An economy can only maintain two of the three at the same time. This principle is frequently called the "impossible trinity," "unholy trinity," "irreconcilable trinity," "inconsistent trinity," "policy trilemma," or the "Mundell–Fleming trilemma."

The impossible trinity (also known as the impossible trilemma, the monetary trilemma or the Unholy Trinity) is a concept in international economics and international political economy which states that it is impossible to have all three of the following at the same time:

a fixed foreign exchange rate
free capital movement (absence of capital controls)
an independent monetary policy

The options are:

Option (a): A stable exchange rate and free capital flows (but not an independent monetary policy because setting a domestic interest rate that is different from the world interest rate would undermine a stable exchange rate due to appreciation or depreciation pressure on the domestic currency).
Option (b): An independent monetary policy and free capital flows (but not a stable exchange rate).
Option (c): A stable exchange rate and independent monetary policy (but no free capital flows, which would require the use of capital controls).

The aggregate demand–inflation adjustment model builds on the concepts of the IS–LM model and the AD–AS models, essentially in terms of changing interest rates in response to fluctuations in inflation rather than as changes in the money supply in response to changes in the price level.

The AD–IA model is a Keynesian method used to explain economic fluctuations. This model is used to show undergraduate students how shifts in demand or shocks to prices can affect real GDP around potential. The model assumes that when inflation rises the interest rate rises (monetary policy rule). It also assumes that when real GDP exceeds potential, there is upward pressure on the inflation rate and vice versa.

The model features a downward-sloping demand curve (AD) and a horizontal inflation adjustment line (IA). The point where the two lines cross is equal to potential GDP. A shift in either curve will explain the impact on real GDP and inflation in the short run.

American economist, Herbert Stein propounded Stein's Law, which he expressed in 1986 as "If something cannot go on forever, it will stop." Stein observed this logic in analyzing economic trends (such as rising US federal debt in proportion to GDP, or increasing international balance of payments deficits) in his analysis: if such a process is limited by external factors, there is no urgency for government intervention to stop it, much less to make it stop immediately, but it will stop of its own accord. A paraphrase, not attributed to Stein, is "Trends that can't continue won't."

AD-AS model w

AD-IA model w

Aggregate demand w
Aggregate supply w

Impossible trinity w

IS–LM model w
Mundell–Fleming model - Wikipedia w

Mundell-Fleming trilemma in emerging economies sc

Stein's Law w
What Is a Trilemma and How Is It Used in Economics? ip