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SWAPS
B.Saiprakash
MBA [IM]
PondicherryUniversity
An Introduction to Swaps
A swap is an agreement between counter-parties to
exchange cash flows at specified future times according
to pre-specified conditions.
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Example
Agreement 3:
1. At maturity, the British company will pay $150
million to the swap bank who will pass it on to the
American company so it can pay its U.S.
bondholders.
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Uses of CURRENCY
SWAPS
Currency swaps have two main uses:
To secure cheaper debt (by borrowing at the
best available rate regardless of currency
and then swapping for debt in desired
currency using a back-to-back-loan).
To hedge against (reduce exposure to)
exchange rate fluctuations
HEDGE
Instead of forward contracts, the swap bank
also could hedge its swap position by using
a money market position.