The seller may not deliver the product at the agreed price or the buyer may not pay the agreed price (Willis, D., n.d).
Foreign Exchange Swap.
A currency swap is when two or more parties agree to exchange a set amount of currency for another in a specific period of time (QFinance, n.d). There are few advantages of a currency swap according to QFinance, (n.d) is the "flexibility, assistance in which both parties limit or manage their exposure to fluctuations in interest rates or to obtain a lower interest rate and the reduction of counter-party risk, as evidenced by the bid–ask spread.".
The disadvantages of entering into a currency swap are that the other party might fail to meet its obligations either during the period of the swap or upon maturity. According to QFinance, (n.d), "If one of the parties decide to exit the swap before maturity, the exiting party must secure the consent of its counterparty before pursuing a mutually agreed exit strategy, much as in the case of selling an exchange-traded futures or option contract before maturity. Some exit routes include the following:.
1. Entering into an offsetting swap. For example, the exiting party could enter into a second swap, this time receiving a fixed rate and paying a floating rate.
2. .Selling the swap to a third party. As swaps have a calculable value, one party may sell the contract to a third party, with the permission of the counter-party.
3. Purchasing a "swaption." This allows a party to set up, but not enter into, a potentially offsetting swap at the time they execute the original swap.
Exchange Rate Arrangements.
In 1944, The International Monetary Fund (IMF) was created to encourage exchange stability (Radebaugh, Gray, & Black, 2006, p.351). This group consists of the currencies 133 member countries in which were assigned a fixed exchange rate based on the gold and the United States dollar. The countries involved in this fund were able to float freely in a band of one percent on either side the exchange rate value which put pressure on the dollar because it caused informal devaluation or revaluation of the currency.
