What is a firm loan?
A firm loan is a foreign loan that must be paid in hard currency, which is the currency of a nation that has political stability and a reputation for economic power.
How a firm loan works
A firm loan is a type of loan between a lender and a borrower in two different countries and is denominated in hard currency. Hard money is a monetary system widely accepted worldwide as a means of payment for goods and services. It usually comes from a country with a strong economic and political position, and it may not be the currency of the borrower or lender. A firm loan greatly reduces the risk that would exist if it were denominated in less stable currencies.
Special considerations for a firm loan
So what makes a currency difficult to qualify? It should remain relatively stable over a short period and be very liquid on the foreign exchange market – or forex (FX) – on which currencies are traded. The foreign exchange market is the largest and most liquid market in the world, with average traded values of trillions of dollars per day. It includes all the currencies of the world.
Forex transactions take place for cash or forwards and are executed over the counter and 24 hours a day. There is no centralized market for forex transactions. The largest foreign exchange markets are located in major financial centers, such as London, New York, Singapore, Tokyo, Frankfurt, Hong Kong and Sydney.
The currency must also have a high value. The value of a currency is mainly based on economic fundamentals such as gross domestic product (GDP) and employment. The international strength of the U.S. dollar reflects U.S. GDP, which in the third quarter of 2020 was the first in the world at $ 20.16 trillion. China and India had the second and seventh largest GDP in the world, respectively, but neither the Chinese yuan nor the Indian rupee is considered a strong currency. This helps explain how central bank policies and a country’s stable money supply also play a role in exchange rates. The U.S. dollar is considered the world’s foreign reserve currency, which is why it is used in 70% of international business transactions.
Example of a firm loan
A loan agreement between a Brazilian company and an Argentine company in which the debt is to be paid in American dollars is a type of firm loan, since American dollars are considered to be strong currencies and more stable than Brazilian real or Argentine peso. .