Due to Changes Essay

Pages: 10 (3465 words)  ·  Style: Harvard  ·  Bibliography Sources: 10  ·  File: .docx  ·  Level: Doctorate  ·  Topic: Economics

As it can also be observed that what Citibank did in the India market is also on example of online transactions. Furthermore the users are now able to transact money through their mobile devices. One more amazing feature which can be observed is that users will be able to deposit money through ATM machines by this the burden on the branch networking will be lowered. The development in the technological field have provided users several methods to transact whichever suits them the best, hence more consumer focused exercises are being conducted these days.

It can be observed that advancements in the technological factors enable the financial institutions to provide the customers better services and best response in timely manner.

Risks and Benefits of Carry Trade Strategies:

Within the last couple of decades, there have been many changes in the techniques and approaches in the field of investments. In the past, there were very simple approaches that were adopted by the entrepreneurs and potential investors, but today, due to changes in global economical and financial environment etc., the investment approach has been modified too. And since the new approach of 'Carry Trade', the investors enjoy the highest possible benefits in terms of high and positive return. But at the other end, the investors also have to face some of most critical risks and issues and threats that can spoil the entire investments and instead of generating the positive outcomes, the investors will have to face the losses.

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Although, the risks and threats in this approach are quite high, but since the carry trade strategy has been introduced, it has become the most popular approach among all the potential investors because if the right moves are taken at the right time, the return will surely be positive and within the best interest of all the stakeholders. One of the most important fundamentals to note here is that this approach can only be used if the investment amount is quite large. Therefore the risk factors that are associated with this strategy are high too. But since the huge capital and investment is required, only the large sized organizations and entrepreneurs play with this strategy (Henderson, 2006).

Essay on Due to Changes in the Assignment

Analysis: Below some of the key risks and benefits are discussed in details that are associated with the carry trade strategy;

Risks Associated with the Carry Trade Strategy:

As discussed above the carry trade strategy is no doubt very efficient and effective approach to generate the positive results and outcomes in terms of high return and secure profit, but at the other end, there are many elements that are considered to be the threats and serious issues and could seriously harm the investors. Below the report will discuss the key risks and issues;

Currency Risk: It is a fact that the approach of carry trade is held unhedged. This clearly indicates when the sum of capital has been invested; the return rate must be higher than the adverse exchange rate activities. But in case of the activities that are performed in the market offer high than the carry trade strategy, the investor will make loss. Although, there are many fundamental approaches and techniques that are currently being used by the professionals in the market, but it is to not that due to changes in the economical and financial conditions, the calculations may not work.

Leverage Risk: A part from the above, the potential investor and forex trader will also have to keep in mind that once the investment has been made, the unfavourable changes and fluctuation in the market may also generate the huge losses. Therefore the strategy has to be handled quite efficiently and professionally.

Interest Rate Shift Risk: Moreover, the most important and critical element that is observed to the highest risk for the investors is the changes and fluctuation in the interest rates. In case if the interest rate decreases, the investors will have to face the risks of losing the returns and profits.

Benefits Associated with the Carry Trade Strategy:

Cheap Borrowing Costs: If the investors manage to borrow the currencies on the low rate, the returns will probably be high. But it is not easy as it seems, it needs efficient approach to ensure that the borrowings are at the cheap costs.

Flexibility of Investment Yield Choice: Once the currencies are borrowed, the investors have flexibility to avail the opportunity in investing in the currencies that may offer high interest rates.

Ability to Leverage on Borrowings: The investors always have right to borrow the currencies at the low rate and invest them to generate the high interest and produce the high incomes.

Example of Carry Trade:

In order to understand the concept of the carry trade, an example of mortgage refinancing will be the best approach to understand. Say for example if a person refinances its mortgage at lower rate and buys a car. The performance and efficiency of the car can be assumed to be the return because the loan for the car is at higher rate and the person cannot afford to but the car with the new car loan. But once the mortgage was refinanced, the borrowed amount is not at the low rate and he can easily buy the desired car.

International Capital Markets:

As the globalization has influenced the business sector across the globe, it has removed the local boundaries and now world is being observed as the single market where the freedom of trade is possible, by this approach the business sectors tend to take their operational activities across the local boundaries and gain the competitive advantage provided by the new country. Similar can be observed in the financial sector, as the boundaries between the capital markets have been removed and now companies tend to invest in other stock markets which in other countries (Watson, 1986).

The pace of globalization in the financial sector especially in the capital markets have made it possible to realize the flow of money from around the world, at first the capital markets of the countries were separated in terms of rules and regulations which lead towards the difficulty in obtaining the foreign capital. As soon as these barriers were removed, many companies started to take participate in the international capital markets as it possesses some major benefits for the organization, like the cost of capital is being reduced since the company is able to invest in the diversified portfolio of stock exchanges, as international capital markets provide the companies to participate in various stock exchanges at the same time, by this the companies have the opportunity to invest in various instruments and financial papers, moreover the fluctuation in the same company's share not necessarily will be equal to the variation in the other country. By this the threat of losing money is reduced so is the risk that the company bears by investing money in different shares (Hussain, 2000).

Analysis: the companies are also able to reduce the risk associated with the investment, as the companies can invest in highly diversified portfolio of business which makes them to seek various options for investment, and investing in several assets always disperse the risk associated with the investment. The other benefits for the company to work in the international capital environment are the fact that local and international markets do have common methods and procedures that needs to be followed. However the international market for capital provides much more benefits to the company as compared to the local market. The investors and the borrowers are connected in by the market services and it makes the company to operate with equity and debt (Hussain, 2000).

Major benefits of the international capital markets are the fact that many large corporations are the investors in this market and the borrowers also have large portfolio on which they work.

The cost of equity can be defined as the return that the stock holders require for and from the company; normally it is being extracted from dividend per share and current market value of the stock. Whereas the cost of debt is normally referred to the cost that the company needs to pay in order to generate the current debt. This can be measure even after the tax returns or before it. The both costs are the important feature of the company's capital structure. If the company manages to decrease the cost for debt it means it has to pay less amount in order to generate the capital, which means financial sector can provide more money on less cost which is very beneficial for the company as it reduces the cost which directly influences the balance sheet. In other words it can also be said that decrease in the cost for raising the capital provides the company to generate more capital on low cost.

From the borrower's point-of-view, since the market provides… [END OF PREVIEW] . . . READ MORE

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