Currency Swaps - A currency swap is an agreement denominated in different currencies. Counterparties exchange interest payments (fixed or floating) for debt/investment services in two (or more) currencies. - Currency swaps are suitable when the end users want to make cross-border capital investments or projects. Example: an American company wants to finance \( 31,250,000 € \) project undertaken by its subsidiary in Spain. This company could: 1. Borrow in \( \$ \) and convert to \( € \) - which risk would this company run? 2. Borrow in \( € \) through its subsidiary - what if the subsidiary is unknown or has a low credit rating? 3. Find a counterparty for a currency swap - How? 30
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The company has three options to finance this project: borrowing in dollars and converting to euros, borrowing in euros through its subsidiary, or finding a counterparty for a currency swap. Show more…
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