The combination of spot transaction nd forward transaction is called swap transaction.vry.well explained sir bt.as a professional I feel in a swap transaction, currencies r temporarily exchanged between traders.This means a trader can buy currencies using a spot transaction nd sell the same currency thru a forward transaction.A contract in which a double reversing forward transaction is done nd which is called as forward forward swap transaction in FT in my opinion.A swap margin varies according to the currencies forward discount nd forward premium.Thus the bid askspread has the least value for spot transaction among all transactions in my opinion in nut shell in international business.Vry nice md useful Lecture.Thanx
Thank you. I have a question though on the payment side. How and when does the actual delivery of 40m euro happen. The whole intent was to make 40m euro available to US firm in France.
Nice video! Question! In the example you provide there is no spread? so therefore the SWAP bank doesent make any money? correct? There will be a spread in reality right?
Are there any possible scenarios where the swap might go wrong due to changing interest rates for any of the currencies or if the currency rate itself changes?
I'm sorry, but can you clarify something? How can US firm pay to the Swap Bank 6% euros if this firm requires euro and did not had it before? So as EU firm is paying to the SB interest in $, but from where? And how did these firms exactly get required currencies in required amount?
It seems a lot of people here are confused as to why company A has an absolute comparative advantage.From what I understand we should not be comparing the 8% domestic rate with the 7% foreign rate. Instead, compare the 7% foreign rate it would have had to pay with the 6% it actually pays. Same in the case of company B, compare the 9% it would have had to pay with the 8% it actually has to pay. Essentially each firm is taking advantage of the fact that the other firm can borrow locally at a lesser rate.Correct me if I'm wrong
but what if these two companies need a slightly different amount of money borrowed? why would company A be interested in borrowing $52mln when it only needs $51,7mln for example? I don't think these SWAP banks are always able to find an exact match when two companies need the same amount of money
8:00 I don't understand the example. Company A does not have Euros, only Dollars. If Company A wants to pay the Swap Bank a Euro 6% interest, it needs to first exchange its Dollars to Euros, putting it at an exchange rate risk. So, what's the point of this, then?
i have the same doubt which confuses me. However, looking at the other comments, i believe that the 2 parties would have "swapped" the loans denominated in their own currency at the start of the swap.
Note that at the end, company A from USA will have to make principal repayment of €40M. How will they make that repayment of principal amount in € if they can't even make smaller interest payments in €? The answer is that they are expected to do so by using their Euro proceeds in that foreign country. Otherwise they will be exposed to exchange rate risk. Using $ to pay for interest payments once in a while (by exchanging them for €) does not make that much difference. Instead if this becomes the norm, currency swap will be rendered useless.
They are only exposed to fx risks if their business abroad does not generate positive cashflow from operations to actually pay the debt in the respective local currency.
Sir my question is if swap Bank charge 1% charge for both firm transaction or if some other x% charge on tax then advantage of currency swap get cancelled ?
For company A borrowing in euros costs him 7% whereas for company B borrowing in euros costs him 6%, 6% is better for company A. Thus it enters into the swap.
the main principal amount is set at the time of the contract. In a currency swap, the principal to be paid at maturity in one currency is equal to the principal expressed in the other currency * the exchange rates at the time of maturity.
If the bank takes say 1/4%, then for example, Firm B might pass 8.25% to the bank and the bank passes 8% to Firm A, which will leave the bank with 1/4%, and B paying 1/4% more. Likewise, A could send the bank 6.25% and the bank only passes 6% to B. Here the bank gets some of the gains from the swap and both A and B pay a little more. However, both A and B are still better off than without the swap.
Is the Company A and Company B need to exchange?Company A is the french company ,Company B is the US company because I thought is the french company that want borrow 52million USD dollar but why it end up borrow 40 million euro
