INTERNATIONAL FINANCIAL MANAGEMENT

International Financial Management

International Financial Management

Section A

Question 1

The global financial crisis is the resultant of multiple causes that are directly and indirectly related to the situation. The several causes that led to the global financial crisis includes availability of easy credit conditions during the period of 2002-2008 which led to the encouragement of high risk lending and borrowing practices, international trade imbalances, bubbles in the real estate markets during the burst, fiscal policies related to the government revenues and expenses, bailout packages provided to the banking and many private bondholders due to increase in the debt burdens. According to Conklin and Cadieux (2008) the initial financial disaster started US subprime residential mortgage market and it was spread all over the world in institutions that dealt with the financial instrument of mortgage. Firms, banks and other lending financial institutions found that as a result of the crisis in the mortgage market their net worth was decreasing due to the guarantees provided against the mortgages.

On the other hand investors got a shock when new kinds of hedge funds were introduced in the markets that increased the risk volatility. This situation created crisis for many banks as they had to obtain additional equity capital in order to sustain the confidence of their depositors and meet their regulatory requirements. All these causes eradicated liquidity from the financial system.

Many of the banks operating in US and UK were facing lending cut back that led to the credit crunch situation. Not only the consumers but the government was unable to borrow money and spend on pre-crisis situations. Many of the businesses in order to protect themselves from the financial crisis also started to reduce their investments and also reduced their workforces which created unemployment crisis in the country. On the whole failures in the financial regulations were unable to control the mortgage crisis. Too many financial firms were unable to breakdown the corporate governance and were unable to avoid too much risk. On the other hand households started to borrow too much which led to the crisis in the financial system. The increase in lending of people who no income, no jobs led to the poor financial conditions when the interest rates were increased by the Fed. Many of the important banks were either asking for the bailout packages or they had gone bankrupt as a large portion of money was not recovered. For example Lehman Brothers, JPMorgan Chase bought another bank and etc. In order to pass on the poor financial conditions on to another market and thus soon a secondary market erupted.

Therefore the financial crisis started off due to the subprime mortgage market in US which created lending problems for the banks and thus soon economy was faced with recession, unemployment, low incomes and etc. There are several other causes for the financial crisis that was spread globally but the two core causes are mortgages and lending problems faced by many financial institutions.

Question 2

LIBOR is the London Interbank Offered Rate and ...