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Chapter 10

Swaps

8.1 Forex swaps

 Two parties agree to swap equivalent amounts of currency for a
period and then re-swap them at the end of the period at an
agreed swap rate.

 The swap rate and amount of currency is agreed between the
parties in advance.

 The main objectives of a forex swap are:

– to hedge against forex risk, possibly for a longer period than
is possible on the forward market

– to access capital markets, in which it may be impossible to
borrow directly.

 Forex swaps are especially useful when dealing with countries that
have exchange controls and/or volatile exchange rates.

Illustrations and further practice

Now try Illustrations 3 and 4, and TYU 6 in Chapter 10

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