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Essay / Research Paper Abstract
This 3 page paper answers questions set by the student, looking at how the Australian Dollar and the Swiss Franc performed against each other in 1984, the presence of exchange rate risks, a brief explanation of covered interest rate parity and a consideration f how to avoid exchange rate risks when borrowing in a foreign currency and seeking to buy real estate. The bibliography cites 1 source.
Page Count:
3 pages (~225 words per page)
File: TS14_TEauswiss.rtf
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Unformatted sample text from the term paper:
francs would have seen as relative increase in the repayments, as it takes more dollars to buy a Swiss franc, the borrowers need to make the interest or capital repayments.
2. Where borrowing takes place in a different currency there is the risk of the exchange rate changing. Exchange rates fluctuate with supply and demand. If the demand for the
currency that the loan has been made in increases relative to the home currency, then there will be a higher level of repayment required, if it falls there will be
a gain. The influences that impact may be inflations rates, interest rates and general economic conditions increasing or decreasing the demand factors. There are also risks associated directly with the
interest rate, changing repayment terms, currency movement problems and changes in taxation laws. 3. In 1984 the Austrian borrowers believed the Swiss franc was safe but they did not consider
the historical evidence that many currency, when floated, will have an initial volatility. The borrowers saw a stable rate and assumed that the Australian dollar would continue as stable. There
are also models such as purchasing parity and interest rate parity which indicate when there is a disparity between inflations and interest rated, the currency values will adjust to create
parity. This had not occurred in early 1984, and the investors may be seen as over optimistic ignoring pervious evidence form other countries. 4. The basis of covered interest rate
parity is that that where the forward currency markets are used to determine that payoff with the domestic currency on a foreign loan that there should be an equality between
the amounts This means that the risk is seen as low, but so are the benefits of the borrowing in a foreign currency, therefore there is little benefit and lttle
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