CFA Text- SWAPS

Volume 5- Reading 40- Page 270 Question says that a U.S. company needs to raise 100,000,000 in EUROS, and will do so by issuing “dollar-denominated” debt. It say’s that interest rates in US and eurozone are falling, would you want to pay fixed or floating? Answer say’s…since interest is paid in Euros…pay floating. I can see why would you pay floating because rates are falling…but aren’t they wrong about paying interest in Euros…its dollar-dominated, so wouldnt they be paying interest in dollars? Compare this to the example on page 236-237 where a company issues debt in YEN…and the payment calcs on interest are in YEN.

the US company takes on $debt … swaps it into euros (bec that is what they really want)… you (the US company) now have euros in debt and you will pay euros as interest… also recieve $interest from your swap dealer and will use that to pay off your original $debt

Well than that conflicts with the example on page 236 and 237…because the company has debt denominated in yen…swaps…and still pays interest on the debt in yen…1 of these 2 examples have to be wrong.

cfacfacfa Wrote: ------------------------------------------------------- > Well than that conflicts with the example on page > 236 and 237…because the company has debt > denominated in yen…swaps…and still pays > interest on the debt in yen…1 of these 2 > examples have to be wrong. no, it clearly says “annual CFs will involve paying euros and recieving yen” … pg 237, first line

damn you swaps…damn you. thx bips

  1. you issue n1 in your currency, and pay a% interest in your currency. This issue is bought by several clients (xxx) 2. you give that n1 in your currency to a counterparty, which pays you b% interest in your currency 3. he gives you n1 converted to the foreign currency you are looking for (n2), and you will have to pay him c% interest in the foreign currency At the end: 4. you give back n2, in the foreign currency, to your counterparty 5. he gives you back n1, in your local currency 6. you give back n1, in your local currency, to the xxx bonholders So, during the life of this: + You have been paying a% in your local currency + You have been receiving b% in your local currency + You have been paying c% in the foreign currency I have not looked at the exercises, but I think that: + The us company issues usd debt. Then they do the swap. In the swap, they are paying c% in eur (as they are going to fall, you better pay floating) + In the other example, I think you are forgetting that, although in the wap they are paying c% in the foreign currency and receiving b%, the first step is issuing a bond in their jpy currency… so they will always pay that interest in yen, regadless of how they hedge with the swap does it make sense?