Monetary stop is a special financial instrument, which is used both banks and institutional investors and international companies.Despite the fact that all kinds of swaps - currency, equity and interest - about the same work, the first exhibit certain characteristics.
Such an operation as a currency swap, always involves two market participants wishing to exchange currency to obtain the desired maximum benefit.To illustrate the essence of a currency swap, consider the following hypothetical example.
Given a British company (Company A) wishes to enter the US market and the American corporation (b) - to increase the geography of its sales in the UK.Typically, loans and credits, which banks issue non-resident companies have higher interest rates than those granted to local firms.For example, company A may issue a loan in US dollars at 10% per annum, and Company B - loan of GBP under 9%.At the same time, rates for local companies is much less - 5% and 4% respectively.Companies A and B may enter into mutually beneficial agreements among themselves, under which each organization will receive credit in their national currency at a local bank at cheaper rates, then there will "exchange" loans through a mechanism known as currency swaps.
assume that the British pound and the US dollar on the Forex market exchange rate of 1.60 USD for 1.00 GBP, and every company needs the same amount.In this case, the US firm B will receive £ 100 million, and the company A - 160 million dollars.Of course, they will have to compensate for the interest payments of its partner, but the technology swap allows both firms to reduce their costs to repay the loans almost doubled.
In order to simplify the example has been ruled out role swap dealer acts as an intermediary between the parties to the transaction.Participation dealer slightly increase the cost of loans for both partners, but nevertheless the cost will be much greater if the parties will not apply to technology swap.The amount of interest that the dealer adds to the cost of credit, as a rule, not too big and is in the range of ten basis points.
should also be noted this type of operation such as currency and interest rate swaps.In this case, the parties exchange interest payments, directed to repay foreign currency loans.
note a few key points that make foreign exchange swap transactions are different from other types of similar operations.
Unlike the swap, which is based on income, and the percentage of simple swap, currency swap involves a preliminary and then the final exchange of the agreed advance amount of credit obligations.In our example, the company implemented the exchange amount of $ 160 million to £ 100 million at the beginning of the operation, and at the end of the contract they will make a final exchange - returns the amounts to the appropriate parties.At this point, both partners at risk, because the original exchange rate of the dollar and the pound (1.60: 1) certainly have changed.
In addition to most characteristic swaps nettingovanie.This term means to offset the cash.The total return swap transaction, for example, the yield on the index can be exchanged on the income of a certain security.Earnings per participant netting transactions in relation to the income of the other party to a specific date agreed in advance, and only one payment is made.At the same time, periodic payments that are related to currency swaps, nettingovaniyu not be.Both partners undertake to implement the appropriate payment within the stipulated date.
Thus, the currency swap - is a tool with which achieved two main objectives.On the one hand, they cheapen the cost of borrowing in foreign currency (as in the example above), and on the other, they can hedge the risks that are associated with abrupt changes in exchange rates on the market Forex.
