Directory Categories:

Finance From the Net 2U We have collected the best sites related to finance. Find the products and information related to finance that you are looking for in our directory.

Currency Swap as a Source of Corporate Finance

Organizations, both profit and non-profit. often need finance for many reasons; expansion, growth, consolidation, payment of dividends and many more reasons. At times, these funds may not be sitting idle in some bank vault on their behalf, but have to be borrowed. While there are sources of funds, both short and long term, firms are always on the market for cheaper sources of funds. Apart from the low interest a cheaper fund attracts, firms can also use it for a significantly long time, without feeling the pinch. For firms in the market for foreign currency for investment purposes abroad or any other reason, a currency swap is usually a good source of cheaper funds.

Currency swap, which is one of the basic financial derivatives instruments, involves private negotiations between 2 parties to swap a specified payment obligations denominated in one currency for a payment obligation denominated in another currency. For instance, swapping USD (US Dollars) for Euros.

Currency swap came about because of foreign exchange restrictions introduced by countries on the amount and cost of obtaining foreign currency. Currency swap is a very good method of bypassing these restrictions. Its main advantage is the provision of a cheaper source of funds for the companies concerned. For instance it would be easier for a US-based corporation to raise USD than for a European-based corporation; likewise, it would be easier for a European-based corporation to get hold of Euros than a US-based one. It also bypasses restrictions imposed by governments on foreign currency.

Currency swaps can be plain vanilla currency swap or interest rate swap. Plain vanilla currency swap involves the exchange of principal and interest in one currency for principal and interest in another currency. The principal sums exchanged in the two currencies are equal to each other.

Currency swaps may involve initial set up costs such as agent fees and the cost of finding and linking interested parties which may be high. Since swaps are Over-The-Counter (OTC) agreements and privately negotiated, they carry with it the risk of default. This cannot be compared with exchange-traded instruments which are relatively safer. However, it is left to the companies involved to fully analyze the cost and other related expenses to justify the use of currency swap to raise foreign exchange. If the cost is not justified, then another source should be considered.

Article Source: http://www.articlesbase.com/currency-trading-articles/currency-swap-as-a-source-of-corporate-finance-4072047.html

FundsAndFinance.com is a financial blog and authority on all matters relating to financial subjects such as pensions, mortgages, investment s, foreign exchange (currency exchange) and much more. Although we are primarily geared towards the UK financial sector, most of our aticles are relevant to people worlwide looking for financial clarity.

Our picks: