Got through all three exams ignoring currency swaps. Now I’m going back and realize they’re relatively straight forward. That said, I still have a few questions. Using fixed-fixed, I understand that there are two swap rates (and two yield curves), I pay semi-annual swap rate in currency X * NP(X), receive semi-annual payment in currency Y * NP(Y). NPs are swapped at the beginning and the end of the contract. All fine and dandy.
My question: How complete of a hedge is this for currency risk? If I’m a European company operating in the US, I issue €bonds, swap it to USD, I pay USD interest and receive € interest over the life of the contract. At the beginning, I receive, say, $500M and invest immediately in my US factory. At the end of the swap, I have to pay $500M back…however, I’ve spent that original $500M on my plant, so I’d have to go back into the market and buy $500M USD. The rate I buy the USD at the end of the contract could be very different from the beginning exhcange of NPs. Obviously you can hedge the purchase with a forward contract (given the amounts are contractual), but currency swaps are touted as an FX hedge… this seems like very incomplete hedge to me.
What am I missing?