currency swap who is who

CFA Level II
#1

Assuming I am a US company looking to enter into a currency swap to hedge my investment or w/e.

So i enter the agreement with counter party B who is a bank based out of Mexico.

Assuming Notional is $100 Million.

So am I the one who is giving my $100 M to company B? and they give me the equivalent in Pesos?

That leads me to my next question. Am I making payments to company B (US interest rate x the $100 M)?

I am little confused on these because on interest swaps it says fix payer and and float payer so I know who is who.

#2

If you’re receiving pesos (through your other investment), then you want to pay pesos and receive dollars. Thus, you give $100M and receive MXN1.254B. During the swap, you’ll receive USD and pay MXN (maybe fixed, maybe floating), and at the end you’ll receive $100M and give MXN1.254B.

#3

This is great! I did not fully understand the actual exchange of money in currency swaps either. Thanks for a brief, but very useful example/explanation.

#4

Glad it helped.

My pleasure.

Note that the interim cash flows will reflect the current exchange rate, but the final swap of notionals will reflect the exchange rate at initiation, not at termination.

#5

Oh ok i got it.

So how its applied is. I have a subsidary and mexico and everything is in pesos. I’m worried about the PESO depcreciating vs the USD. Therefore i’d enter into that swap above and pay the peso and receive receive the usd so i don’t get hit with loses when i consolidate my subsidiarys balance sheet.

Am I applying that correctly?

thanks S2000

#6

If you chose to use a swap, that’s what you’d want to do. The general rule for swaps (maybe for life in general): give away what you don’t want, get what you do want.

However, a currency forward (or future) may make more sense than a swap; why trade the notional when all you want to do is hedge the interim payments?

My pleasure.

#7

This was very helpful, as always.

#8

Good to know. Thanks.