FINS3635 Week 5 - Swaps(3) - Currency Swaps(Hull Ch 7 A...

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1 Currency Swaps (Hull, Ch. 7) A swap is an agreement to exchange cash flows at specified future times according to certain specified rules Fixed-for-fixed currency swaps For example: an agreement to pay 11% on a sterling Week 5 - Currency Swaps FINS 3635 Options, Futures and Risk Management Techniques 1 (British Pound) principal of £10 million & receive 8% on a US$ principal of $15 million every year for 5 years. What are cash flows? Typical Uses of Currency Swap Conversion from a liability in one currency to a liability in another currency Conversion from an investment in one currency to Week 5 - Currency Swaps FINS 3635 Options, Futures and Risk Management Techniques 2 an investment in another currency Comparative Advantage Arguments for Currency Swaps (Table 7.8, page 167) Microsoft wants to borrow AUD BHP wants to borrow USD Week 5 - Currency Swaps FINS 3635 Options, Futures and Risk Management Techniques 3 USD AUD Microsoft 5.0% 7.6% BHP 7.0% 8.0%
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