Business and Management: Foreign exchange and financial derivative
The Santander versus Metro do Porto case is a typical example of how companies use financial derivatives to increase their profits. Santander made the most of the financial crisis to increase the interest accrued from its deal with MdP by tricking the Portuguese government into accepting the complex terms. After the financial crisis, many European governments were looking for an opportunity to reduce the amount of money, and they could use in terms of loan repayments.
However, things turned south for the Portuguese government as it found itself in an awkward situation in which it has to pay more. The loan interest rates escalated from a meagre 4.79 per cent to a staggering 40.6 per cent in seven years. By the time the Portuguese government stopped paying its debt, the money had increased from 89million Euros to 459 Million Euros.
This case study presents information on how companies pounce on opportunities to maximize on the foreign exchange and financial derivatives. Back in 2009, the world was going through an unprecedented economic crisis. Thus, financial institutions were dishing out deals that could benefit them in the long term, for instance, the Santander-MdP agreement. The foreign exchange derivatives entail forward and future contracts as well as the available options.
The Coronavirus pandemic is taking the world by storm, meaning that the international community, as well as the individual countries that form it, are going through unprecedented times. The economic growth rate is exponentially slowing down, while stable currencies are depreciating in terms of value. In forward contracts, the investors want to minimize their risks to exchange rate volatility. As an example, at the moment, the forex exchange rate is very volatile meaning that they will exercise utmost caution.
Thus, when selling commodities to their clients during the Covid-19 pandemic, they will most likely prefer to be paid over a long period stretching into the future. Forward contracts come in handy in such scenarios. They do not want to lose their ground in case the currency exchange rates go against their well-being. Thus, even if they make losses, they will not seriously hurt their welfare.
Regarding future contracts, the investors are also likely to pounce on them as there is rife speculation of the global economy sliding into depression. In this context, the investors looking for huge returns will try to make more money depending on the weakening or strengthening of the currency. However, such contracts could come with considerable risks in case their anticipation is wrong.
Options will allow the investors to buy or cash currencies at specific price valuations. They can execute these transactions at any given time as long as the offer is still on. These scenarios are significant in the prevailing situation as already the sterling pound, euro as well as the US dollar has started weakening.
The investors will pounce on this opportunity to make more profits by cashing in when they feel they can make the most profit. Many will probably make the most of forwards as they will shield their prospects in a long time. These are unprecedented times as many economies are on the verge of shutting down, and the supply chains will be severely affected. Using the foreign exchange derivatives investors will make sure that they at least come out with something as opposed to being at the receiving end.