UGC NET COMMERCE June 2019 Q97
0. Currency swap is a method of:
- Option : A
- Explanation : A currency swap is the simultaneous purchase
and sale of a given amount of foreign
exchange for two different value dates. Swaps
are transacted between international
businesses and their banks, between banks,
and between governments when it is desirable
to move out of one currency into another for
a limited period without incurring foreign
exchange risk.
Currency swaps between multinationals are frequently used both as a hedge and as a means of securing overseas financing. The swaps may be bilateral or multilateral. They may be simple or highly complex. As a relatively simple example, a French company may have a Brazilian subsidiary that needs more local currency for expansion. Through an investment bank or a broker, the French company locates a British firm whose Brazilian subsidiary has surplus domestic currency. The French company makes the swap by buying the Brazilian cruzados from the British company and simultaneously entering into an agreement to reserve the sale at some future date. Nominal interest rates are agreed upon at the outset.
The swap is a hedge in the sense that foreign currency liability is matched by a similar foreign currency asset. Furthermore, neither loan requires the approval of any government agency, and the cost of funds can be cheaper than funds from alternative sources. Besides, the swap may be one of the few sources open to non-resident companies for securing the use of foreign exchange over a period of time at a fixed rate.
