Page 158 - DMGT549_INTERNATIONAL_FINANCIAL_MANAGEMENT

Unit 9: Interest Rate and Currency Swaps

and the strike price on the cap are identical. The term and periodicity of the cap and swap Notes
are also identically matched. There is no up-front premium payable.
10. Zero-coupon Swaps: Like a zero-coupon bond, the player in a zero-coupon swap will
make only one fixed payment at maturity. The ultimate fixed payment is a single forward
rate based on the compounding of the immediate cash flows at the swap rate. This structure
is most commonly used in conjunction with zero-coupon bond issues, so the issuer’s net
cash flow is almost identical to what it would have been if it had issued a low cost coupon
floating rate instrument.
11. Commodity Swaps: Innovations in the swap market have enabled users to link the
transactions to various floating indices. Commodity swaps have proven to be such an
innovation. Commodity swaps work the same way as interest rate swaps except the
floating index is based on commodity, most commonly gold, oil or wheat. It is a useful
hedging tool for manufacturers which require a certain commodity for the production of
their goods, yet are exposed to an increase in the price of the commodity.

Task Review the annual report of an MNC of your choice. Did the MNC enter into a
swap deal in the recent past? Explain how the MNC benefited from the swap deal. Also
perform a forecasted scenario analysis to show how the MNCs would fare in the coming
years.

Self Assessment

Fill in the blanks:
13. The earliest swaps were …………………… .
14. A …………………… entails the exchange of debt denominated in one currency for debt
denominated in another currency.
15. The most important reason for firms using currency swaps has been ……………………
and hedging.

Case Study China Currency Swaps and Prepping for the Last

Monetary Frontier

hina seems to be waiting patiently in the wings, as the U.S. Dollar may be starting
its next decent just in time for another EU crisis to emerge. China has been
Cnegotiating currency swaps in preparation for the day it must intervene on the
world monetary front, perhaps making its currency the Yuan a defacto candidate for
reserve currency status as the Dollar's fortunes decline.
Currency Swaps

Currency swaps are typically motivated by comparative advantage, and the term can
refer to two different types of transactions as follows:

In the foreign exchange market, a currency swap is an agreement between
counterparties to exchange one currency for another on one value date and then
reverse the transaction on another value date.
Contd...

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