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INVESTMENT SWAPS

Discuss INVESTMENT SWAPS within the Financial Management ( FM ) forums, part of the Resolve Your Query - Get Help and discuss Projects category; INVESTMENT SWAPS Investment swaps are investments in a foreign currency asset, which have no foreign exchange risk. In most cases, ...

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Sunanda K. Chavan
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INVESTMENT SWAPS - October 8th, 2010

INVESTMENT SWAPS

Investment swaps are investments in a foreign currency asset, which have no foreign exchange risk. In most cases, the risk is eliminated by the execution of a foreign exchange swap. The most common investment swap is not liquid, although a semi liquid swap can be dealt. The appeal of the investment swap to the investor is higher yield. Credit risk is usually comparable to other bank paper. See example 5.

Negotiable Investment Swaps

The underlying foreign currency investment vehicle in most swaps is a bank term deposit that is nonnegotiable. Because the underlying deposit is illiquid, the swap is also illiquid. However, a swap could be done using a negotiable investment such as treasure bills, banker’s acceptances, or commercial paper.

In this case the investment could be liquidated, although not as simple as if underlying currency of investment is home currency. To liquidate the swap, the investor would sell the negotiable investment of underlying foreign currency and unwind the outstanding forward contract by doing a foreign exchange swap.

Borrowing in Foreign Currencies

Borrowers in today’s markets have a variety of ways of raising money. Some borrow in foreign currency because they have revenues in that currency which was used to service debt. Others borrow in another currency because they believe that the currency being borrowed will weaken, thereby reducing the overall cost of borrowing.

Other borrowers in foreign currencies have no offsetting revenues and do not want to incur any foreign exchange risk. They will fully hedge their foreign borrowings by means of a foreign exchange swap transaction in much the same way investors hedge their foreign fixed income investments.

Swaps Using Currency Options
In managing foreign currency exposure in foreign currency investment, three principal alternatives are available:

1. The first alternative is simply to leave the exposure unhedged for the time being. However, doing nothing has considerable risk, which may be beyond the risk that the investor wants to assume.

2. A second alternative is to use forward contracts. Doing so, however, will might generate a return similar to investment made in home currency.

3. The third alternative is currency options.
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Rose Marry
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Re: INVESTMENT SWAPS - April 18th, 2016

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Originally Posted by sunandaC View Post
INVESTMENT SWAPS

Investment swaps are investments in a foreign currency asset, which have no foreign exchange risk. In most cases, the risk is eliminated by the execution of a foreign exchange swap. The most common investment swap is not liquid, although a semi liquid swap can be dealt. The appeal of the investment swap to the investor is higher yield. Credit risk is usually comparable to other bank paper. See example 5.

Negotiable Investment Swaps

The underlying foreign currency investment vehicle in most swaps is a bank term deposit that is nonnegotiable. Because the underlying deposit is illiquid, the swap is also illiquid. However, a swap could be done using a negotiable investment such as treasure bills, bankers acceptances, or commercial paper.

In this case the investment could be liquidated, although not as simple as if underlying currency of investment is home currency. To liquidate the swap, the investor would sell the negotiable investment of underlying foreign currency and unwind the outstanding forward contract by doing a foreign exchange swap.

Borrowing in Foreign Currencies

Borrowers in todays markets have a variety of ways of raising money. Some borrow in foreign currency because they have revenues in that currency which was used to service debt. Others borrow in another currency because they believe that the currency being borrowed will weaken, thereby reducing the overall cost of borrowing.

Other borrowers in foreign currencies have no offsetting revenues and do not want to incur any foreign exchange risk. They will fully hedge their foreign borrowings by means of a foreign exchange swap transaction in much the same way investors hedge their foreign fixed income investments.

Swaps Using Currency Options
In managing foreign currency exposure in foreign currency investment, three principal alternatives are available:

1. The first alternative is simply to leave the exposure unhedged for the time being. However, doing nothing has considerable risk, which may be beyond the risk that the investor wants to assume.

2. A second alternative is to use forward contracts. Doing so, however, will might generate a return similar to investment made in home currency.

3. The third alternative is currency options.
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Hello dear good post!,

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