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US quantitative easing

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  1. Introduction
  2. Quantitative Easing in US Economy
  3. The Unwinding of Quantitative Easing
  4. Quantitative Easing and ABC Plc
  5. Conclusion

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. [...]


[...] The success of stock market is not completely the result of quantitative easing. Even without QE, the stock market will still be attractive to investors since the average Price/Earnings ratio of US stock market has drown to its lowest level in 15 years. It means that stock price is undervalued, in related to the firm's earnings. The Quantitative Easing policies, however, helped boosting the stock market partly. Other factors, in particular the low bond yields, has affected the exchange rate of the dollar (Kurihara, 2006).Besides that, the QE programme unwinds is likely to cause losses to both Central Bank and investors, as well as the stability of the financial system. [...]


[...] In contrast, lower interest rates often lead to decrease in exchange rates. As a result, the volatility of interest rates surely leave the investors exposed to risks of exchange rate. Volatile interest rates can lead to unstable cost of leverage, while exchange rate can harm the value of the investment in case its currency devaluated. Investors are endangered by the increasing credit risk. Quantitative Easing and ABC Plc The unwinding of US Government has some impacts on ABC Plc's financial performance as well as its competitiveness in the market. [...]


[...] (2013). Misdiagnosis and Malaise. Kennedy School. Sprenkle, C. M., & Miller, M. H. (1980). The precautionary demand for narrow and broad money. Economica, 407-421. Taylor, John B. (2009) Need for a Clear and Credible Exit Strategy,? in John Ciorciari and John Taylor, eds.,The Road Ahead for the Fed. Chap Stanford, CA: Hoover Institution Press, pp. 85-100. [...]

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