Moral Hazard Essay

Decent Essays
Q1: According to the textbook, a moral hazard is described as being “the problem created by asymmetric information after a transaction occurs” (Mishkin & Eakins, 2012, p. 26). As far as financial markets are concerned, a moral hazard exists when a lender understands the risk that a borrower might engage in activities that would hinder their ability to repay a loan. As the threat of a moral hazard increases, the likelihood that a borrower will repay a loan decreases (Mishkin & Eakins, 2012). The concept of moral hazards is important to financial institutions because being aware of its existence allows those institutions to implement measures aimed at minimizing the potential threats posed by moral hazards. In a case where a business is in …show more content…
20). More directly, organizations were no longer restricting themselves to relying on just their home country to secure the funds needed for the operation of their business. Internationalization also meant that organizations could seek or take advantage of investment opportunities abroad. One of the investment opportunities available in the international bond market comes in the form of a foreign bond. To be considered a foreign bond, the issuing company residing in one country must have issued the bond in a foreign country in a currency that is native to that foreign country (Mishkin & Eakins, 2012). As an example provided by the textbook, early railroads built in the United States were financed by foreign bonds sold in Britain during the nineteenth century (Mishkin & Eakins, …show more content…
The higher an organization can sell its shares for, the higher the amount of funds it can generate to support its operating activities (Mishkin & Eakins, 2012). Likewise, the price at which an organization is able to sell its shares for serves as a reflection of how profitable it is seen to be (Bramble, n.d.). The foreign exchange market is yet another of the markets that plays an important role in the financial market. The foreign exchange market is important because it allows organizations to sell their products and services in a foreign currency amount that equals the selling price in their native currency (Mishkin & Eakins, 2012). The knowledge gained from the foreign exchange market adds to its importance because it tells organizations if there is any profitability in selling their goods and or services in a foreign

Related Documents

  • Decent Essays

    Hedging will help reduce the risk involve with transaction exposure. By hedging corporation can use foreign currency derivatives to hedge against the effect of the changes due to the fluctuation of the exchange rate. This can help guard their assets from future losses and it’s a way to ensure that its cash flow do not fall below the necessary minimum. One type of hedging is called the purchase option. According the International Accounting book, this option gives buyer the right, but not the obligation to exchange currencies at a predetermined rate (Doupnik, 2015).…

    • 792 Words
    • 4 Pages
    Decent Essays
  • Decent Essays

    Foreign Bank Case Study

    • 1157 Words
    • 5 Pages

    Foreign banks which based in another country that acted as a financial institution whose primary activity is to act as a payment agent for customers to borrow and lend. Foreign bank is a bankwith head offices outside the country in which it is located. Foreign bank is obligated to follow the regulations of both the home and host countries. Because the foreign banks loan limits are based on the parent bank’s capital. Foreign banks can provide more loans than subsidiary…

    • 1157 Words
    • 5 Pages
    Decent Essays
  • Decent Essays

    As a result, TEP utilized forward contracts to hedge against a weaker yen (Iajima, 2013). It is imperative to hedge against currency risk since companies’ profit can dissipate quickly due to the fluctuation of exchange rate. In some instances, companies may suffer a major loss regardless of an increase in sales. A hedge is a way to safeguard against currency risk. Forward contracts, currency swaps and natural hedges are some of the ways to lower currency risk.…

    • 735 Words
    • 3 Pages
    Decent Essays
  • Decent Essays

    FX Derivatives Case Study

    • 890 Words
    • 4 Pages

    The main advantage of this hedging is that it reduces FX risks and provides certainty on the receipt of the future net income. In particular, hedging can add value if net income received in USD represents a greater proportion of total company’s revenue (Muff et al, 2008). Conversely, if the company expected to meet its future liabilities in the US currency to pay out to its suppliers, or finance investment project with high growth opportunities, a long USD/short GBP position in forward or futures contracts can help in budgeting the costs. FX forward and futures…

    • 890 Words
    • 4 Pages
    Decent Essays
  • Decent Essays

    Also, global trade increases consumers of the companies which in turn raises the income of firms. Additionally, global trade results in advance payments. Companies will be able to buy their raw materials for manufacturing products with the money paid earlier to them. Purdy (2011) stated in his article that global trade makes foreign company to pay their amount in advance. When a company receives payments immediately from the foreign company, it reduces payment risk.…

    • 990 Words
    • 4 Pages
    Decent Essays
  • Decent Essays

    2.1 Introduction In this chapter, previous literature concerns with the determinants of foreign currency hedging will be discussed and assessed. Theories for the determinants of foreign currency hedging can be evaluated from two aspects: the level of foreign exchange exposure and how firm’s value will be affected; what kinds of characteristics for the firm influence its decisions for hedging. I will discuss the determinants of foreign currency hedging from this two points of view in the following sections. Multinational corporations (MNCs) involve in foreign currency hedging activities because of their foreign exposures will have an impact on its expected cash flows. The determinants of foreign currency exposure should be consistent with factors…

    • 1361 Words
    • 5 Pages
    Decent Essays
  • Decent Essays

    Earned capital is the actual profit the company is making from their operations. A company that makes high-earned capital is more likely to pay out dividends. For an investor dividends are very important because this is how investors make profits. To an investor, paid-in capital will turn to earned capital, which then should result in dividends and higher stock…

    • 719 Words
    • 3 Pages
    Decent Essays
  • Decent Essays

    From the general literature, equally fixed as well as active gains from trade are likely to be established. The fixed achievements from global business refer to the upgrading in production or social wellbeing with fixed amount of participation or reserve supply (Jin & Li, 2011. They are for the most part the results from the increase in overseas reserves as well as societal benefits. Initially, the inauguration of the worldwide market offers a chance to do business at global costs as compared to domestic prices. This opportunity provides an increase from trade as local customers can buy less expensive imported commodities and manufacturers can send abroad products at higher overseas costs.…

    • 973 Words
    • 4 Pages
    Decent Essays
  • Decent Essays

    It is because credit rating has direct impact on the price when a company or government issue bond in the market. Higher credit rating like AAA is the sign of high creditability and value of bond that is enough to attract investors and influence bond prices (Johnson, 2010). Inflation: The rate of inflation is also a factor that influences the bond prices. It is because any change in inflation has direct impact on the interest rates, which ultimately affect the price of financial securities. Due to this reason, inflation is also considered as determinant of bond prices.…

    • 1306 Words
    • 5 Pages
    Decent Essays
  • Decent Essays

    Gfc Case Study

    • 1073 Words
    • 5 Pages

    In fact, 99% of the income of these entities was not come from the budget of creditors but instead from that of investment banking, there are perverse incentives for not providing accurate ratings. On that account, should CRAs provide investment banks with lower credit rating; they, the investment banks, can and will loiter around other agency who could give them a more buoyant rating. Thence, CRAs with the fear of loosing their attraction, will bias towards a more optimistic rating hence provide investor with the misleading information for making decision. Although, the impact of CRAs on GFC would have been lessened if there had not been a heavily reliance of investors on these entities or if there would have been another external entities to regulate the rating of CRAs, the fact that securitized assets are far more unpredictable and extremely intricate makes this nearly imposible. On the one hand, as most of CDOs, MBSs or CLOs are combinationsof different tranches of mortgage debts and there is also asymetric between originators and investors, it is impratical for investors to access the rating by themselves.…

    • 1073 Words
    • 5 Pages
    Decent Essays