In one of Shweser’s mocks, there’s a question (Exam 3 Afternoon, Q45, Book 1) about a US investor investing in a dual currency bond issued by a US company that makes fixed interest payments in Japanese Yen but will make the final principal payment in US dollars. The investor is afraid that the yen will weaken and so wants to offset this JPY exposure.
The answer is he should enter into a swap to pay JPY and receive USD with no exchange of principal.
My question is:
What if he enters into a swap with an exchange of principal? What is the downside here?
If the principal payment is made in JPY as well, what is the appropriate swap to use (the one with exchange of notionals or no notionals)?
1.) The exchange of principal is a normal currency swap. Here, it wouldnt make any sense in the context of the situation because they need currency exchange of the interest payments, and not a loan or a big exchange of principals.
2.) It’s called a regular currency swap as seen in Level 2
Got it. So simply because the investor has no need for JPY there’s no need to exchange of notionals. The exchange of principals do not provide any hedging benefits, correct? It is merely to provide access to foreign funds that may difficult (or too expensive) to get for a domestic firm.