In todays video we learn about currency swaps.
Another day, another video on derivatives or quantitative finance. today let’s to watch the others i’ve put them all together in a playlist which is linked an over-the-counter foreign exchange derivative between two institutions to equivalent amounts in net present value terms in another currency so why do foreign currency loans at a better interest rate than a company could
As a method of hedging transaction risk on foreign currency loans which you united states at a good interest rate they might be well known by american require a loan in euros for a new factory we’ll say if they’re building a might have to pay a higher interest rate the same time a european company might wish to finance a project in the united they could get in their local
Market instead of going through all of the bond the two companies could simply borrow in their local currencies where a derivative called a currency swap a currency swap differs from an interest interest rate swap there’s no reason for the counterparties to wire each other because the sum of money is denominated in two different currencies and after their domestic currency
The principal amounts are exchanged at the beginning chosen to be equal given the exchange rate at swap initiation so that the borrowing currencies of the counterparties okay so now that we know we’ll use the example from my book trading and pricing financial screen right now shows an example of a four-year agreement between british pounds and receives fixed four percent
In u.s. dollars they each make dollars and 10 million pounds this is a fixed for fixed currency swap okay so i swaps? fixed for fixed currency swaps can be broken down into a position in two can watch my video on how they are valued at the link above if you are the value with domestic cash flows – the spot exchange rate foreign currency received leg of the swap its value
Equals the spot exchange domestic cash flows so that’s it on currency swaps make sure to hit the like to see more of my videos on derivatives and quantitative finance have a great