Question
Consider the following statements regarding the “Currency Swap Agreement” between two companies:
Select the correct answer using the code given below:
- It is used to obtain foreign currency loans at a cheaper interest rate
- It removes the exchange rate risk
Select the correct answer using the code given below:
Answer: Option B
Answer: (b)
Currency Swap Agreement: US India $1 = Rs. 70 In US, the US company can raise loans at 6%, but for an Indian company doing business in US, the loan rate is 8%.
So, the US company will raise a loan of $1 billion at 6% and give it to the Indian company working in US.
The Indian company will keep on paying the interest rate at 6% and after the term ends, it will give back the $1 billion amount to the US company.
In India, the Indian company can raise loans at 9%, but for a US company doing business in India, the loan rate is 11%.
So, the Indian company will raise a loan of Rs. 70 billion at 9% and give it to the US company working in India. The US company will keep on paying the interest rate 9% and after the term ends, it will give back the Rs. 70 billion amount to the Indian company.
A currency swap is an agreement in which the two parties (multinational· corporations/governments) exchange the principle amount of a loan (and the interest) in one currency for the principle and interest in another currency.
At the start of the swap, the equivalent principle amounts are exchanged at the prevailing rate. At the end of the swap period, the principle amounts are swapped back at either the· prevailing rate or at a pre-agreed rate such as the rate of the original exchange of principle amount.
Currency swaps are used to obtain foreign currency loans at a better interest rate or· as a method of hedging transaction risk on foreign currency loans. Currency swap agreements can be at the government and the company level both.
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Answer: (b)
Currency Swap Agreement: US India $1 = Rs. 70 In US, the US company can raise loans at 6%, but for an Indian company doing business in US, the loan rate is 8%.
So, the US company will raise a loan of $1 billion at 6% and give it to the Indian company working in US.
The Indian company will keep on paying the interest rate at 6% and after the term ends, it will give back the $1 billion amount to the US company.
In India, the Indian company can raise loans at 9%, but for a US company doing business in India, the loan rate is 11%.
So, the Indian company will raise a loan of Rs. 70 billion at 9% and give it to the US company working in India. The US company will keep on paying the interest rate 9% and after the term ends, it will give back the Rs. 70 billion amount to the Indian company.
A currency swap is an agreement in which the two parties (multinational· corporations/governments) exchange the principle amount of a loan (and the interest) in one currency for the principle and interest in another currency.
At the start of the swap, the equivalent principle amounts are exchanged at the prevailing rate. At the end of the swap period, the principle amounts are swapped back at either the· prevailing rate or at a pre-agreed rate such as the rate of the original exchange of principle amount.
Currency swaps are used to obtain foreign currency loans at a better interest rate or· as a method of hedging transaction risk on foreign currency loans. Currency swap agreements can be at the government and the company level both.
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