If i wanted to buy a building in Europe or simply want to gain exposure to the EUR, i could do a currency swap with USD… but I can also just buy EUR spot , right? Or if I wanted to lock in a rate I could just buy EUR fwd. So what is the benefit of currency swap and can you give an example?
thanks
If you buy spot you’re holding the currency in your wallet.
If you buy forward you can invest the collateral and get domestic rate.
With swaps, one of the advantages is you may get a cheaper loan.
An American company trying to get a loan in Europe would have to pay a higher rate as compared to trying to get a loan from an American bank. Same thing with the European company. The American and European company can get into a currency swap. Let’s say Ford can borrow at 5% in US but 8% in Europe. Let’s say BMW can borrow at 2% in Europe but 7% in US. Ford and BMW can get into a currency swap and US will effectively borrow at 2% and BMW will effectively borrow at 5%
Insurance companies use them frequently.