Managing Interest Rate and Exchange Rate Volatility Assignment

Managing Interest Rate and Exchange Rate Volatility - Assignment Example Buckley (1996) identifies two other types of interest rate risk, which include basis risk and Gap risk. If interest rates are determined on a different basis for assets and liabilities then a firm having loans and debts will face basis risk. A company faces basis risk when the interest rates on its loans and debts are determined using different basis. (Buckley, 1996) Assume for example that Kaufman & Connelly Plc issues a fixed rate bond to fund its financing needs and at the same time gives out a loan to another party at a floating interest rate. Her interest payments will therefore be fixed while interest receipts will be variable and will depend on prevailing rates. She will therefore be facing basis risk since her interest expenses and revenues will be determined on different basis. A company faces gap risk when it has both fixed rate liabilities and assets. When fixed rate liabilities exceed fixed rate assets then there is positive Gap, with a positive gap a rise in short term rates increases margins while declining rates decrease margins. On the contrary if fixed rate liabilities are less than fixed rate assets, then there is negative gap. In this case a rise in short-term rates decreases margins while a decrease increases margins.(Buckley, 1996). Elekdag and Tchakarov (2006). Changes in interest rates have also been the major determinants of business cycles or trade cycles in emerging markets such as Thailand in recent times. (Elekdag and Tchakarov, 2006). The figure above is an indication of how interest rates and business cycles are related in Thailand. High interest rates lead to low output whereas low interest rates lead to high output. Therefore Kaufman & Connelly Plc is likely to face decreases in demand for its products during a period of the high interest rates and increases in demand during lower interest rates. ii. FOREIGN EXCHANGE EXPOSURE Exchange rate exposure can be defined as the degree to which a firm's cash flows, assets, liabilities and value can be affected by exchange rate movements. (Buckley, 1996). According to Buckley (1996), assets, liabilities, profits or expected future cash flows are said to be exposed to foreign exchange risk when a change in exchange rate would result in either a positive or negative change in the home functional currency (home currency) value of the asset, liability, profit, expected cash flow or firm value. The term "exposure" used in the context means that the firm has assets, liabilities, profits or expected future cash flow streams such that the home currency value of assets, liabilities, profits or the present value in home currency terms of expected future cash flows changes as changes in exchange rates occur (Buckley, 1996: pp 133). From the foregoing foreign-currency-denominated assets and liabilities as well as expected foreign-currency-denominated future cash flow streams are clearly exposed to exchange rate risk. (Buckley, 1996; Shapiro, 2003). Buckley (1996) also notes that home-currency-denominated expected future cash flows may also be exposed to foreign exchange risk. For example, a firm based and selling goods in the United States may be competing with European firms and as such its expected future c

Abyssinian crisis 1935-1936 Essay Example | Topics and Well Written Essays - 2500 words

Abyssinian crisis 1935-1936 - Essay Example Benito Mussolini, the fascist ruler of Italy, had a vision for Italian Empire, similar to the Roman Empire, to rule over the Mediterranean and to also take revenge of the Italian defeat at the Battle of Adwa which happened in Ethiopia on March 1, 1896. Mussolini pledged the Italian people "a place in the sun," as England and France who both had large empires at the time had colonial possessions. Ethiopia was a main candidate of this expansionist ambition for several reasons. Following the rush for Africa by the European imperialists it was one of the few remaining independent African nations, and it would serve to merge the Italian-held Eritrea to the north-west and Italian Somaliland to the east. It was thought to be militarily vulnerable, and abundant in resources.Britain's interest lay around Lake Tana and the headwaters of the Abay (Blue Nile). Italy's main interest was in linking Eritrea with Italian Somaliland. France's interest was the territory to be crossed by the railroad f rom Addis Ababa to Djibouti in French Somaliland.France and other Europeans were not much concerned at the thought of an Italian conquest of part of Abyssinia, given that their own interests were secured. Thus Italy eventually came out as a victor in the Abyssinian War with the major booty with other countries having their trivial share in the pursuit.The Italo-Ethiopian Treaty of 1928 that drew up the boundaries between Italian Somaliland and Ethiopia stated the border was 21 leagues parallel to the Benadir coast. The Italians re-interpreted this to mean 21 nautical leagues, rather than 21 standard leagues, which then gave them greater territory. Acting on this, they built a fort at the Walwal oasis in the Ogaden desert in 1930. In 1934 Ethiopian territorial troops, along with the Anglo-Ethiopian boundary commission, disputed Italy's invasion. The British members of the commission soon withdrew to avoid an international incident. The tensions resulted in a clash that left 150 Ethiopian and 50 Italians dead. The issue was the Abyssinia Crisis tabled at the League of Nations. The League of Nations absolved both the warring parties in September 1935. Italy then started to build its forces on the borders of Ethiopia in Eritrea and Italian Somaliland. With an eminent attack, the Emperor Haile Selassie ordered a general mobilization. His new recruits consisted of around 500,000 men, many of whom were armed with primeval weapons such as spears and bows. Others were equipped with more new weapons, including rifles, but many of these were from the late 19th century and as such were often obsolete (Pankhurst, 605-608)1. Abyssinian Crisis 1935-1936: An Introduction The Second Italo-Abyssinian War was a brief war between the Kingdom of Italy and Ethiopia in the early 1930s. It resulted in the occupation of Ethiopia into Italian East Africa. It resulted in the Abyssinia Crisis at the League of Nations, which is often seen as a manifestation of the incompetence of the organization. In 1935, Emperor Haile Selassie of Ethiopia while addressing the League of Nations attacked the Italian invasion. On October 3, 1935, Marshal Emilio De Bono moved into Ethiopia from Eritrea without declaration of War. He had 100,000 Italian soldiers and 25,000 Eritrean soldiers under his command. A smaller force, under the command of General Rodolfo Graziani, moved into Ethiopia from Italian Somaliland. By October 6, Adwa fell to De Bono's forces. By October 15, De Bono's forces moved on to capture the capital of Axum. The occupying Italians plundered the Obelisk of Axum after annexing the city. On October 7 although the League of Nations declared Italy as the aggressor however was unable with effective sanctions. The British and French drafted the Hoare-Laval Plan; it highly favored the Italians, and was