Page 160 - DMGT549_INTERNATIONAL_FINANCIAL_MANAGEMENT

Unit 9: Interest Rate and Currency Swaps

Cheaper products are usually in greater demand in challenging financial times, while in Notes
abundant times people tend to seek out and pay up for higher quality items.
A sudden disruption to U.S. Dollar based trade would potentially set the United States and
its trade position back decades, and preparation for this day's ultimate arrival has been
happening for years.

Nevertheless, too many systems at the heart of survival and functioning depend on a
stable financial trade mechanism. In the end, the only budget that matters is yours, and it
is also the only place where you have some control. This remains the one to study, plan
and forecast for.
Questions

1. Critically analyse the above case.
2. How will currency swaps aid China in promoting trade?
3. Are there any other alternatives available to china to gain multi-dimensional
advantages?
Source: http://www.silverdoctors.com/china-currency-swaps-and-prepping-for-the-last-monetary-
frontier/

9.6 Summary

Swaps are essentially a derivative used for hedging and risk management.
The basic idea behind swaps is that the parties involved get access to markets at better
terms than would be available to each one of them individually.
There are various kinds of swaps, but interest rate swaps and currency swaps have mainly
been developed to resolve some of the problems associated with back-to-back and parallel
loans.
Interest rate swaps are a flexible and convenient way for companies to manage their
balance sheet and reduce the mismatch between the maturities of assets and liabilities.

They owe much of their existence to the theory of comparative advantage.
A currency swap is a contract involving exchange of interest payments on a loan in one
currency for fixed or floating interest payments on equivalent on a loan in a different
currency.
Currency swaps may or may not involve initial exchange of principal.

9.7 Keywords

Basis Swaps: Basis swaps involve an exchange of floating rate payments calculated on different
basis.

Callable Swaps: A callable swap gives the holder, i.e. the fixed-rate payer, the right to terminate
the swap at any time before its maturity.
Commodity Swaps: Innovations in the swap market have enabled users to link the transactions
to various floating indices.
Extendible Swaps: In an extendible swap, the fixed rate payer gets the right to extend the swap
maturity date.
Putable Swaps: A putable swap gives the seller of the swap (the floating rate payer) the chance
to terminate the swap at any time before its maturity.

LOVELY PROFESSIONAL UNIVERSITY 155