Through 3 phases of QE implementation, QE1, QE2 and QE3, more than 1 billion dollars has been flood out to the market by Fed. Although the effects of QE are still somehow confusing, the QE application in the US proves a positive situation in financial market. Over-using of this method may pose some troubles as indicated in the example of Germany 1920. Hyperinflation is unlikely to happen in the US, however the government should not neglect other financial problems related to the unwinding of QE. Although the QE have saved the market, bond-holders will suffer from significant loss in capital during the government's wrapping up of QE.
It directly affects firms through change in interest rates, in particular cost of debts and loss in value of assets. ABC Plc is not an exception. However, unlike its rival, it sees some positive outlooks of being dependent from Fed and being somehow immune to debt cost rising. There are three methods can be applied to deal with the new government policy: Using a forward rate agreement to manage interest rate, signing futures contract which areless risky in term of less default and liquidity risk and paying attention to the rise of inflation and the devaluation of the US dollars
[...] If the ABC Plc is risk aversion, to hedge from volatile interest rate, it can use futures. A futures contract is less risky than a forward contract in term of less default and liquidity risk. If ABC Plc can tolerate more risks, ABC can use a forward rate agreement, where one party pays a fixed interest rate and receive a float interest rate. However, only the net amount is made between the two parties. Besides that, ABC Plc is exposed to counterparty risks. [...]
[...] US Federal Reserve, Interest Rate (2013). Accessed via: http://www.federalreserve.gov/releases/h15/ US Federal Reserve, Monetary Policy (2012). Accessed via: http://www.federalreserve.gov/monetarypolicy/default.htm APPENDIX Fed Financial Stress Index (1992 2014) (Federal Reseve Bank of St. [...]
[...] Recently, United States has introduced significant quantitative easing policy to recover the economy from the financial crisis.The main purpose of this was to keep the interest rate low to improve the circulation of money and increase the price of commodity without speculation. After recovering from the recession, the Federal Reserve decided to start unwinding Quantitative Easing. The effects of this action are hazardous due to three reasons: cost of debt rising and loss in credit, wrongly priced assets as well as bubbles in the economy along with a big concern over every investor's actions. Since ABC Plc is a high leverage company,it is important to examine the effects of the reversal on US Economy as well as on ABC Plc's performance. [...]
[...] Nevertheless, the Quantitative Easing unwinding action of the Fed shows a positive outlook for the future. It means that the Fed feels that the economy faces less downside risk and it does not need the support from the Fed anymore. There are two scenarios can happen once the unwinding of the QE completes. The first case is the Fed's wrapping up is unsuccessful and leads to a break down in the market. The second case is the QE successfully unwinds. [...]
[...] Money growth and Inflation rates in 1920s in German. (Cooper, 2009) However, the same story does not have to happen with the US. Basically, there are two types of money supply: narrow measure of money (cash and bank reserve) and broader measure of money (M2 and credit) (Sprenkle and Miller, 1980). The rate of inflation mostly depends on the increase in broader measure of money; so in order to have hyperinflation, M2 and credit needs to rise extremely fast. This will happen if the Federal Reserve starts lending out their reserve account massively. [...]
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