Currency Swaps

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?

you are talking about near-far leg FX swaps?

nothing is paid on initiation, difference is paid at the end.

The exchange of Principals in the two currencies happens at the same spot rate at initiation and at the end.

Small but important detail :P. Thanks, Elementary!

You’re welcome, Maximus.

$500m direct investment in factory, it doesnt look like a good example for swaps, which are normally traded in the second market for switching interests. for that 500m, we can call it venture capital.