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Financing – Debt finance

Advantages of using cross currency swaps

 To change the currency profile of debt.

 To reduce interest costs where debt can be raised more easily or
at a competitive rate in a second currency.

 As part of a broader strategy for managing currency risk. For
example, by obtaining foreign currency borrowings to on-lend to
foreign subsidiaries denominated in their local currencies.

Disadvantages of using cross currency swaps

 The risk that the other party to the contract might default on the
arrangement.

 This is a greater risk for cross currency swaps because:

– the cash flows are in different currencies (and hence there
can be no agreement to net them as there could be for
interest rate swaps), AND

– final principals are exchanged (again, unlike interest rate
swaps).

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