Innovations in today's financial systems, both at a national and a global level, have helped the firms to manage their financial sources and essential economic resources amidst external variability more efficiently and effectively than in the past. The practice such as financial engineering and "Zaitech" (i.e., a Japanese-style proactive asset-liability management), which are rarely heard on the street two decades ago, becomes a familiar and even necessary terminology for most corporate chief financial officers (CFOs) to actively respond to the movements in the global financial markets while still being able to maintain high level of risk-adjusted returns on investment and funding flexibility (Das, 1994). This article addresses only a single portion of the CFO's asset-liability management responsibility within a sphere of financial derivatives. Particularly on the asset side of the firm's balance sheet, the CFOs would want to see an improvement in returns generated from both short- and long-term investments while minimizing the risks associated with them. The concept of asset swaps is utilized specifically for this purpose.

The objectives of this essay are 1) to discuss the theory and applications of asset swaps, and 2) to suggest some strategic implications together with their pros and cons for CFOs of companies and foreign affiliates of multinational corporations operating in less developed countries (LDCs) to utilize asset swaps to improve their returns. To these ends, this article is divided into four sections. Section one analyzes the theoretical concept of asset swaps and their relation with synthetic securities and in-house asset swap deals. In Section two, a discussion of some market imperfections in LDCs are presented in view of opportunity and limitation of asset swaps. Given the pros and cons of synthetic portfolio investment and in-house asset swaps, strategic implications for utilizing and managing asset swaps are recommended in Section three. Finally, Section four reiterates the analytical framework and findings of this article as well as paves way for further studies and research.

Theory and Application of Asset Swaps Back to Top

Asset swap refers to the repackaging of an investment that generates fixed (or floating) cash flow stream into variable (or more constant) cash flow stream in which such investment, principal value and the accompanying cash flows, denominated in one currency can also be repackaged into another currency denomination. This concept leads to the two important applications in financial engineering: 1) synthetic securities by financial intermediaries, and 2) in-house asset swaps. Synthetic securities combines existing financial products with customized swap deals so as to change the cash flow streams and payoff patterns normally generated by those market instruments into the desirable ones. Investment banks usually assume the role of underwriters and synthetic portfolio managers to lower transaction costs and enhance creditworthiness of asset swap deals for their corporate clients. They further add liquidity to the swaps using the structure of securitization. In contrast, an in-house asset swap is a privately constructed swap deal with higher degree of customization. The corporate investors must seek their own asset swap counterparty in order to successfully repackage their cash flows. Despite its greater flexibility over the synthetic portfolio in terms of contract size, maturity, and other terms, the in-house asset swaps possess more credit and operational risks, incur higher transaction costs, and face lower marketability. Nevertheless, CFOs should know how to manage these two types of asset swaps so that the overall return profile of the firms could be enhanced.

Asset Swaps as the Exotic Derivatives

Typically, the major functions of financial derivatives include 1) risk management, 2) asset management, 3) lowering cost of financing, 4) completing the market for investors, 5) tax and regulatory advantage, and 6) speculation (Sangha, 1995). One kind of derivatives may serve in one or more functions better than the other kinds depending on their natures. Naturally, there are two types of derivatives: generic and non-generic. Generic derivatives are those traded in the organized markets such as commodity futures, currency futures options on the Chicago Mercantile Exchange (CME), interest-rate options on the Chicago Board Options Exchange (CBOE), currency options on the Philadelphia Stock Exchange, and stock options on the New York Stock Exchange (NYSE). Their contract sizes, maturities, and means for settlement are standardized and follow the exchanges' rules and regulations. Non-generic derivatives are over-the-counter (OTC) in nature. Their terms and conditions vary according to the requirements of the purchasers. Currency forwards, interest caps, floors and collars, and swaps, for example, are principal instruments of non-generic derivatives. Exotic derivatives are regarded as non-generic derivatives because of their OTC and customized nature, except that their structures and variations are more complex than the normal non-generic ones.

Asset swaps are considered exotic financial derivatives because of their unavailability in the capital markets and their complex constructs. Since market participants in asset swaps have diverse characteristics and are classified in different risk classes, it is very difficult to standardize the transactions and trade them in the organized markets. However, many financial institutions have intervened to simplify the designs and arrangements for asset swap deals for their non-sophisticated clients. The results are lower transaction costs and minimal default risks while increasing liquidity. Still, asset swaps are not generally used by individual investors because of their complexity and lack of organized market. Most users are firms that aim to improve their investment returns as well as to reduce risks. They can do so in their portfolio investment by combining the existing standardized market instruments with non-standard swap arrangements. Alternatively, they can also exchange their long-term investment's future cash flows with other firms.

In order to improve the return on portfolio investment, the firm can directly purchase structured products, i.e., the securities embedded with derivatives, from the issuers who cater their debt or equity instruments to meet exotic corporate requirements. These structured products, such as medium-term bonds with equity warrants, allow investors to convert fixed coupon income generated from debt instruments into a higher dividend yield when equity value moves toward the directions in favor of their positions. In the absence of desirable structured products, corporate investors can resort to synthetic securities created by some sophisticated investment banks. The banks can issue synthetic securities by purchasing fixed-rate bonds from general issuers and swapping these bonds with highly-rated counterparty, after which they reissue them to their clients on a floating-rate basis. Investors of synthetic securities will be guaranteed a fixed margin based on the periodic floating-rate index such as London Interbank Offering Rate (LIBOR). Through this channel, investors pay lower transaction costs to the banks than when they directly purchase structured products. The additional benefit from investing in synthetic securities is the low credit risk which is already absorbed by the banks.

Nevertheless, synthetic securities still lack adequate liquidity since the issues are traded between banks and investors. In order to create more liquidity for synthetic issues, the banks employ the structure of asset-backed securitization to repackage them for sale in the secondary market. In securitization process, a trust fund is set up to be a special purpose vehicle to pool many synthetic securities and resell these securitized synthetic issues to the general investors. This pass-through process adds market liquidity to synthetic securities without substantial increase in transaction costs. The investors can still swap their cash flow streams and achieve the same objective as the purchases of structure products and synthetic securities.

For long-term asset swaps, the mechanics described above cannot be very useful for the firms because it is less likely that they can find structured products and/or synthetic securities that have long-term maturity. The firms must seek to swap their fixed assets' cash flows with another counterparty with similar interest. The absence of appropriate swap counterparty will make the transaction less effective since there is a tendency for conflict of interest and a mismatch in performances between the two parties. Even with perfect counterparty, the firms will confront with default risk, high cash-flow fluctuation, and a totally illiquid situation.

Asset Swaps as the Tools for Financial Engineering

The main interest of the CFOs is to maximize the risk-return tradeoffs between investment in assets and cost of funding in liabilities. In the past, corporations experienced less volatility in interest rates and currencies and managed their assets and liabilities in a passive and defensive manner. With today's highly fluctuated interest and foreign exchange rates, companies that invest, borrow, and transact internationally are forced to actively manage their balance sheets. This has resulted in the concept of financial engineering and Zaitech where companies aggressively seek to take advantage of the transitional changes in interest, currency exchange rates, and the fundamental shifts in international capital market structures by factoring them into their corporate strategies. Asset swaps have become the tools for financially engineered multinational firms to be offensive in both spot and future financial markets at home and abroad.

The development of corporate finance from conventional asset-liability management to financial engineering has had significant implications on the management of swap portfolios, especially on the assets side. Traditionally, the CFOs undertook swap transactions which were matched with the characteristics of the underlying asset or liability portfolio. The swap was completed and maintained until designated maturity. The only exception to this pattern was when changes in the underlying asset or debt portfolio were fundamental and necessitated that the swaps be restructured or terminated before maturities. When swaps were viewed as the stand-alone portfolios of cash flows that could be managed independently, the firms started to engineer their financial strategies to squeeze more returns from their current asset portfolios without increasing any more risks and to lower their cost of capital from their liabilities without sacrificing any credit standing. Asset swaps in the realm of corporate financial engineering become more feasible as a result of increased liquidity of the swaps and derivatives markets and the availability of market makers, i.e., investment banks and portfolio managers who are capable of structuring swaps transactions on the customized basis (Das, 1994).

There are two approaches to manage asset swap portfolios: 1) the integrated portfolio approach; and 2) the separate portfolio approach. The first approach treats swap portfolio as an integral part of the asset portfolio, which is equivalent to synthetic securities. The focus of this approach is on the combined cash flows of swaps and the underlying assets. The second approach recognizes the different cash flow streams generated from the assets and the swaps. The advantage of the separate approach is that the maturities of the swaps and the underlying assets can be different, whereas the integrated approach required that both swaps and assets have the same maturity. Thus, it should be distinguishable that traditionally passive asset-liability management usually follows the integrated approach while active financial engineering pursues the separate approach.

Classification of Asset Swaps

Asset swaps can be classified according to the types of the underlying assets namely, fixed- or floating-rate assets. The fixed-rate securities that are repackaged for asset swaps include 1) structured products such as medium-term notes and ex-warrant debt component of a bond with equity warrants issue, 2) pass-through products such as asset-backed securities and collateralized mortgage obligations (CMOs), and 3) illiquid or mispriced corporate and government bonds available in the primary and secondary markets. For floating-rate securities, floating-rate notes (FRNs) and tax-advantaged securities such as municipal bonds are more common.

The target underlying assets for swaps, either fixed or floating, are those that have been relatively illiquid and/or mispriced. Their lack of liquidity is caused by the investors' resistance to accept the innovatively structured issues. The competitive environment in international capital markets also leads to the undervaluation of many new issues. Many of them are traded at a spread substantially below the issue prices. Such aggressively priced, poorly underwritten, and unevenly distributed issues tend to have mediocre performance as they fail to attract the investors' interest. Markets segmentation is also the major cause of mispricing. These assets, once spotted and recognized, shall offer the above-average market returns without changing their risk profiles when they are swapped. If market efficiency hypothesis holds, then as soon as their true values are publicly recognized their premium returns quickly fade away and they are no longer the good candidates for asset swaps.

Synthetic Investment: An Application of Asset Swaps

In view of corporate asset management, CFOs can make use of asset swaps based on two broad strategies. First, they can invest in exotic derivatives by purchasing structured products directly from the issuers, or buying synthetic securities from the investment banks. Second, they can fabricate their own asset swaps by searching for the appropriate swap counterparties and entering into the long-term asset swap agreements. In fact, CFOs can implement both strategies at the same time to achieve optimal financial engineering objectives. The distinction between structured products and synthetic securities is that in the former the maturity of the underlying asset is the same as the maturity of the embedded derivative, whereas the maturities can be arranged differently according to the investors' requirements in the latter. Most CFOs will be attracted to structured issues such as medium-term bonds embedded with equity warrants because of their high liquidity and the improved yields. Synthetic securities such as mortgage-backed security swaps and CMO swaps offer the investors more flexibility in contract sizes and tailor-made maturities. To decide whether to use structured products or synthetic securities, CFOs have to compare the transaction costs between the two exotic issues and weigh them against their market liquidity as well as their customized flexibility.

For those CFOs who want to engineer their own in-house asset swaps, they have to encounter with certain credit or default risk emerged from their counterparties. The greater flexibility obtained from this long-term asset swaps is traded off with the lack of liquidity and the difficulty in finding the most appropriate creditworthy counterparties. Also, in the countries where capital markets and financial intermediaries are not well-functioned, CFOs do not have many choices to invest in the synthetic assets except that they synthesize on their own. The implications of the in-house asset swap structure are the following. First, the investors are responsible for two sets of cash flows, including the cash flows on the underlying assets and the cash flows under the swaps. Second, the credit risk on the in-house asset swap transactions is more complex than the synthetic securities that the investors face with credit risk on the underlying assets and with the swap counterparties. Conversely, the swap counterparties have a risk on the investors and will usually treat the transaction as an allocation of credit lines to the investors, potentially imposing a constraint on future transactions. Third, the accounting and revaluation structure of the transactions will be very complicated as both the underlying assets and swaps will be treated separately. This may result in value discrepancies and accounting exclusions such as off-balance sheet items which distort the reporting of the investment. And fourth, the liquidity of the in-house asset swaps will depend on both the liquidity of the underlying assets and the swaps. The cost of liquidating the synthetic investment will be the sum of the cost of the bid-asked spread for both components. These factors imply that CFOs who choose to do the in-house asset swaps must have a thorough knowledge and expertise in evaluating credit risk of the counterparties, and have no significant need for any secondary market liquidity for the transactions.

Synthetic Investment in Less Developed Capital Market Back to Top

In my opinion, much can also be said about the characteristics of the financial derivatives and capital markets in LDCs. In Thailand, for example, the organized capital market is relatively young, i.e., only twenty years old since 1975, and quite imperfect. The imperfection of the LDCs' markets is caused by several reasons. First, the size of the markets in terms of market capitalization is small. Second, the daily trading volumes are relatively thin compared with most major capital markets in the developed countries such as NYSE, London's Financial Times Stock Exchange (FTSE), and Tokyo's Nikkei. Third, the markets usually lack adequate number of institutional investors like pension and mutual funds which leads to low trading volumes and low liquidity although there have been increasing number of foreign funds participated in recent years. Fourth, the health of the markets is closely tied with the political situations in the countries. Political rumors and coup threats can lend some shocks to the markets. Fifth, government interference and regulatory distortions often and significantly affect the performance of the markets. And Sixth, the lack of transparent reporting and accounting systems in several LDCs makes the markets as a whole less reliable for more sophisticated investors both from local and abroad.

Development of Derivative Products and Markets in LDCs

In view of derivative products development in LDCs especially the emerging economies, the market participants have become more active during the 1990's. Their markets for options, warrants, structured products, and other derivatives instruments on debt and equity are attracting more foreign institutional investors who seek high-yield portfolios from these countries (Fraser, 1994). For example, the combined volumes of OTC debt and equity derivatives ranged from $100 to $140 billion in 1993. The bid-asked spread on a $20 million option market which had been high in the neighborhood of 50 basis points (bps) reduced to about 25 bps in 1993.

To overcome the inefficiencies in LDC markets, several investment and international banks like Merrill Lynch, Swiss Bank, and Austrian-based Creditanstalt innovated exotic derivatives such as steers, knockout and exploding options, and basket warrants. Merrill Lynch's steers are Structured Enhanced-Return Securities which are securitized through a trust fund to create an alternate set of cash flows from the underlying assets plus the swaps (Institutional Investor, 1994). They are sold in the secondary markets where there is not enough liquidity for structured products. Knockout and exploding options of Swiss Bank are designed to lower the transaction costs for local investors. Both kinds of options will be automatically terminated when the prices of the underlying assets hit the preset barriers, even before maturity dates. This automatic expiration limits Swiss Bank's exposure which allows it to lower option premia down to the very competitive level suitable for small investors in LDCs . Basket warrants were launched by Creditanstalt in the Czech and Hungary in order to overcome liquidity and drastic price volatility problems in those countries. Since the stock market in Prague is open only on Tuesdays and Thursdays, most of the stock trading transactions are done off the exchange which leads to the liquidity and price risks for the local investors. These structured products are very popular in the emerging markets where liquidity, price, and transaction costs are the major causes of LDCs' market imperfections.

Synthetic Securities and the Difficulties in LDCs' Financial Markets

Despite the presence of international investment banks and the availability of many exotic derivatives and synthetic securities they have pioneered in LDC markets, the local corporate investors still find it difficult to utilize these instruments to meet their unique asset management requirements. The difficulties posed by the peculiarities of the regional markets together with their structural imperfections leave some significant threats and risks for local and foreign CFOs to execute asset swaps using synthetic securities. Proper valuation techniques and sophisticated pricing and hedging models are needed to take advantage on the illiquid and mispriced issues that are available in the markets.

Bid-asked spreads on several derivative products in local currencies are currently large and represent the lack of liquidity on long-term instruments as well as the intrinsic risk of the underlying assets. These two components of the spread will decrease only if liquidity improves in both the short- and long-runs as more institutional investors participate and structural imperfections are reduced through continuous market development such as the short-term money markets, the more active presence of brokers and dealers, and the growing global interest in LDCs' securities. Despite the large bid-asked spreads, pricing of synthetic securities requires careful risk analysis of the issues (Banque Indosuez, 1994).

In-house Asset Swaps: The Innovative Role of Corporate CFOs in LDCs

The practices of Zaitech and financial engineering in today's corporate finance have thrusted corporate CFOs to adopt the proactive view of asset-liability management. They can no longer rely on the investment bankers to design or customize financial product packages for them without any control over the resultant cash flows. As far as financial engineering practice is concerned, CFOs must treat the cash flow streams generated by either the underlying assets or the swaps separately. In handling their unique credit risk profiles, price movement behaviors, accounting and reporting procedures, and different costs of liquidation, CFOs must be very alert, innovative, and aggressive in keeping up with the changes in local and global capital market conditions, financial technologies, and government policies and regulations that directly and indirectly impact the asset swap transactions.

To precisely pinpoint the objective of long-term asset management and return improvement, CFOs who are fully equipped with advanced information technology and loaded with valuable market data bases must seize the opportunity to swap their cash flows with appropriate counterparties locally and internationally. The risk and cost elements caused by market inefficiencies can be turned into premium and profit if they know how to hedge their risks and share their cost burdens with their counterparties on a fair basis. The asset swap transactions, if successful, could turn their loose relationships into the closer ones in which business alliances and strategic joint-ventures can be formed. In fact, asset swaps can be done with more than one counterparty: the more counterparties the firms are able to arrange for swaps, the more diversified the deals can be and the more complex and expensive such deals are too. Strategies and techniques for in-house asset swaps shall be fully discussed in Part III.

Strategic Implications of Synthetic Investment in LDCs Back to Top

One of the most important concerns for the CFOs in arranging the asset swap deals is how to seek for good counterparties. In developed countries where there are many credit-rating agencies who consistently conduct credit evaluations on companies in several industries, the CFOs can obtain reliable credit information of companies they target to be their swap counterparties. But this can rarely be the case for LDCs as many local companies are not willing to disclose their hidden reserves and financial secrets either to the government authorities or the private credit-rating agencies for fear of tax penalty and strategic leakage. Inexperienced CFOs may find it very risky to swap the companies' assets even though they have substantial inside information about their target counterparties since that piece of information can become irrelevant as situations change. Much is dependent upon the intuition and experience of the CFOs in deciding whether or not to engage in the long-term asset swaps with the selected companies.

Experienced CFOs are much sought after especially ones who used to work with several companies in different industries. Their insights and judgements will add another perspective to the available credit information to fine-tune the decisions. Not only must they be professionally well-round in corporate finance and well-known in capital markets, but they also have to be very academic-oriented in following up the new research and findings in advanced finance area. Some of the better-qualified CFOs are promoted to the rank of chief executive officer (CEO) with distant involvement in the asset swaps. To effectively engage them into the decision-making process of selecting the counterparties, asset swaps and the related synthetic investment must be integrated into the overall corporate strategies in which they can participate and contribute their expertise. Thus, the key to the successful search of asset swap counterparties in the less efficient capital markets is the knowledge and experience of the financial executives as well as their superiors' intuitive judgements.

How to Reduce Default Risk

The problem of credit risk on the in-house asset swaps is magnified since the firms have to be fully exposed to the risk that their swap counterparties default. Experienced CFOs have three alternative approaches to value their asset swaps. According to Robert Jarrow and Stuart Turnbull (1995), the first approach views complex derivative such as asset swaps as the contingent claims not on the swaps themselves, but as "compound options" (i.e. integrated cash-flows approach) on the assets underlying the swaps. In practice, this approach is difficult to implement because the underlying assets are illiquid i.e., their market prices cannot be discovered. The second approach is to ignore the credit risk and price the swaps as "default-free options". However, this approach is not acceptable since it lacks consistency with reality where defaults by swap counterparties are possible.

Jarrow and Turnbull thus suggested the third approach called "vulnerable options", based on Hull and White (1990) work which viewed the event of default to cause a discontinuity in the option's value. This vulnerable or discontinued option is sometimes called "digital option" (Banque Indosuez, 1994). In this approach, both a stochastic process for the evolution of the default-free term structure and the term structure for risky asset are exogenously specified (i.e., separate cash-flows approach). Arbitrage-free dynamics for these term structures and a risk-neutral valuation procedure are derived. The valuation result from the third approach should be better than the former two approached since the credit-risk element is factored into the calculation.

How to Reduce Cost of Liquidation

On top of credit risk problem the firms face when conducting the asset swaps, illiquidity of both underlying assets and swaps becomes another important issue. When the swap counterparties actually default, the firms inevitably seek to liquidate the transactions as quickly as possible. Unfortunately, the cost of asset swaps liquidation can be very high due to the fact that both sets of assets and their accompanying cash flows are not regularly traded in the secondary markets. The problem is even worse in the LDCs' weak capital markets.

Corporate CFOs and CEOs of either party can anticipate this liquidity problem beforehand and factor this potential liquidation cost into the asset swap deals. Should both counterparties honor the contract until the swap expires, the contingent liquidation cost can be finally removed. The question is how to estimate the value of asset swap liquidation. CFOs can again resort to the former approach in valuing vulnerable options suggested by Jarrow and Turnbull but taking another step further to correlate bankruptcy cost (i.e., cost of default) with liquidation cost. By following the proven approach, the firms can obtain a better estimate of potential swap liquidation cost which will be able to cover the risk of illiquidity in a larger extent.

The Impacts on Financial and Corporate Structures

There will be at least two items added to the traditional corporate balance sheets and income statements when asset swaps are utilized. First, the effects of cash flows of the swap counterparties should be included in terms of non-operating gains or losses, just like the guidelines of Financial Accounting Standards Board (FASB) No.8 and No.52 that require the firms to recognize the effects of currency fluctuation. Second, the reserves for contingent defaults as well as potential liquidation shall be incorporated into the liability side of the balance sheets. These two inclusions will benefit the firms in terms of their financial transparency and market valuation. Sometimes, the firms may be reluctant to disclose such items explicitly because of strategic reasons. It is thus up to the discretion of the firms' management as well as the managements of the counterparty companies whether to report such asset swap transactions to the public. Once the transactions are publicly accountable, their above-average value shall disappear very quickly which might be more harmful to the firms than good since the transactions incur substantial costs and time to carry out.

Undertaking the in-house asset swaps certainly alters the risk profile of the firms' asset portfolios. The effect of changes in assets' risk class must be translated to the firms' cost of capital, which should be commensurately higher if they become riskier. This implies that if such information is made known to the public, then the current and potential creditors shall demand more risk premium to compensate for the additional credit and liquidity risks. Conceivably, this could incur agency cost which can become the corporate structure problem emerging from the conflict of interests between the equity-holders who directly benefit from the improved return on assets and the debt-holders who are not fully compensated for the higher asset risk. Thus, the impacts of asset swaps transactions on the firms' financial and corporate structures could be more negative than ever anticipated.

Conclusion and Future Research Back to Top

Exotic derivatives like asset swaps are used by many companies that aim to improve their returns on asset without changing their risk classes. There are generally two ways for the firms to utilize asset swaps: first, through the purchases of structured products from the issuers and synthetic securities customized by investment banks; and second, via the long-term asset swaps financially engineered by the firms themselves. The benefits of choosing to invest in synthetic securities are the lower transaction costs, the added liquidity, and the default-free risk.

In the less developed countries where synthetic securities are not widely available, the firms have no choice but to fabricate asset swaps for themselves. The ensuing difficulties are how to find the good counterparty to swaps, how to limit the credit exposure, and how to reduce the cost of liquidation should the swaps turn sour. Sophistication on the part of corporate CFOs is the foremost prerequisite for successful asset swap transactions. They must know how to value the swaps, evaluate the counterparty, and estimate the liquidation cost. The decision whether to disclose asset swap transactions on the corporate reporting system is very much debatable. On the one hand, full disclosure can improve the pricing of swaps which shall benefit the valuation of credit risk and liquidation cost.

On the other hand, non-operating performance resulted from asset swap transactions shall trigger the debt-holders to demand more risk premium from the equity-holders although the benefit of such disclosure fades away overnight. It is then concluded that the use of synthetic investment in less developed countries be for strategic purpose rather than for public reporting so that the firms can maximize the conditions of market imperfection to their advantage. For developed countries, it should be used as a means to create more reporting transparencies that reflect the behaviors and performances of the firms operating within the more complete capital markets.

There are some missing links when the author was investigating the asset swaps and synthetic investment issues which can serve as the springboard for future studies. First, the data on derivative markets in less developed countries are not fully available. This can be the direct result of market incompleteness as well as the ongoing development of the capital and derivative markets themselves. Second, the successes and failures of corporate asset swap transactions are not generally known so as to evaluate the effectiveness of the synthetic investment. Third, the theoretical approach to valuing the cost of liquidating vulnerable derivatives is not substantially developed which does not capture the whole riskiness of exotic derivatives. And finally, more deterministic and empirical research should be conducted in the area of financial engineering that take into account the risk and return management of both sides of the balance sheet in conjunction with the changing global marketplaces and advanced information technology.