ACCA Strategic Professional · Advanced Financial Management · Management of international trade and finance
A company can borrow at a fixed 6% in dollars but wants floating-rate euro debt. Why might a currency swap benefit both parties?
A currency swap can benefit both parties because each borrows where it has a comparative advantage and then swaps into the currency or rate basis it wants, sharing the saving. Credit risk remains and exchange movements are not guaranteed.
- AComparative advantage in different markets lets each borrow where relatively cheaper and swap into the desired currencyCorrect
- BSwaps eliminate all interest rate and credit risk
- CExchange rates are guaranteed to move in favour of both parties
- DSwap payments are tax-free in all jurisdictions
Explanation
Swaps exploit relative borrowing cost advantages: each party borrows in the market where its relative advantage is greatest and swaps, sharing the saving. They do not remove credit risk or guarantee exchange movements.
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