During a currency swap why are the interest rates on the various currencies different
Because rates on different currencies are different. If you buy a CD in Japan you get a lower rate than on a CD in the US.
Can the subsequent difference in the various interest rates be considered as a cost of the swap.
What do you mean?
Currency swap between A and B A (an american company) needs 9million euro. B (an european company) is ready to give A the money So A issues a five year $10million 6% bond it then enters a swap with B for the 9 million euro. B makes payments to A at a fixed rate of 5.5% A ‘’, , , B at a fixed rate of 4.9% A only receives $550, 000 from B while it needs $600, 000 to service the bond. there is a shortfall of 50, 000. Am I misunderstanding something?
Yeah, that since they have different interest rates by interest rate parity nobody is supposed to be able to expect to make money n the swap. The increased interest is offset by the currency depreciation.
It shouldn’t be looked at as the cost of the swap. If my memory serves me correctly from Level 1 texts, your example is from where A cannot borrow cheaply by directly issuing a Euro denominated bond. Therefore, they issue a $ bond, and swap it to Euros. Any costs will be the cost of borrowing, and the swap just serves the purpose of conversion at a known fixed rate. The swap in this case is actually saving A some money by allowing cheaper borrowing.
Agree with wyantjs, A did the usd-denominated issuance to lock-in a lower fixed interest rate for (effectively eur-nominated) funding with a usd-eur currency swap. Find currency swap example at CFA I VOL 6, PGS 130-132 (3.1 Currency Swaps), transaction cash-flows are described in Exhibit 3.