Can someone explain to me how swaps can be used to hedge exposure to my foreign debt and deposit please? If I am a Canadian investor who wants to hedge against exposure to exchange rate risk of my USD debt, do I enter into a fix-fix CAD-USD currency swap, with me paying fixed USD interest and receiving fixed CAD interest? Does this sound right? How about if I want to hedge against exchange rate risk on my USD deposit? Do I receive fix and pay float? Thanks in advance!
It depends on your debt obligation. If you are receiving floating rate USD Debt payments - then to offset that you would enter into a Pay Floating, receive fixed Swap. That way your floating receipts and floating payments - both of which are based on LIBOR offset each other.
Ah. So the swap should always be the opposite of what my debt or deposit is. e.g. if I am borrowing from US, I am expected to pay fixed USD interest. So I should enter into a swap that I would receive fixed USD payment, am I right? Similarly, if I am lending in US, I am expected to receive fixed USD interest. So I should enter into a swap that would pay fixed USD interest. I hope I got this right. Because this is always confusing to me. XD
I think so, at least that’s what I garnered from my readings…
OK thanks CP. You have been very helpful. 