Page 148 - DMGT549_INTERNATIONAL_FINANCIAL_MANAGEMENT

Unit 9: Interest Rate and Currency Swaps

Notes
Figure 9.2: Back-to-back Loans

Self Assessment

State whether the following statements are true or false:
1. Parallel loans involve at least four parties.
2. In a back-to-back loan the parties simultaneously lend to each other in the same currencies.
3. Back-to-back loans resemble parallel loans.

9.2 Problems with Parallel and Back-to-back Loans

Both parallel and back-to-back loans were time consuming and expensive to establish. Time had
to be spent searching for a party whose needs would match exactly with the other party. This
proved to be expensive and difficult sometimes. Specifically, there were three major problems
with the parallel and back-to-back loans. First, if one party defaulted the other party was not
automatically released from its obligations under the loan agreement. Second, even though the
two loans cancelled each other out, they were still considered on balance sheet items for
accounting and regulatory purposes. Third, parallel loans were difficult to arrange because it
was necessary to find two counter parties with exactly off setting needs.

Self Assessment

Fill in the blank:
4. Parallel loans were difficult to arrange because it was necessary to find two counter
parties with exactly …………………….

9.3 Terminology Related to Swaps

Swaps terminology is given below:
Swap Facilitators: Swaps are mutual obligations among the swap parties. But it may not
be necessary for the counter parties involved in a swap deal to be aware of each other

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