Submitted By:

Surbhi Agarwal (221154)

Utkarsh Kumar Singh (221156)
Vaibhav Aggarwal(221158)
Definition: Currency Swaps also called
financial swaps, are exchange of cash flows in
two different currencies, based on exchange
rates.
This was first time Currency Swap contract
was executed.
World Bank wanted to raise funds at a
minimum cost.
Prevailing interest rate for US $ was 17%. In
contrast in Switzerland and Germany were 8%
and 11% Respectively.
World bank had borrowed its permissible
limit from both the countries.




IBM on the other hand could borrow at the
best rate, due to its strong credit ratings.
IBM held an advantage of 20bps over the
world bank if raised in Swiss franc. On the
other hand it would raise US dollar at a poor
rate
World Bank can raise US dollar at best rate.
Common need of both the firms resulted in
currency swap contract.
World Bank
IBM
US $205.48
m
CHF 87.78
m
DM117.70
m
Existi
ng
Debt
in CHF
and
DM
US
$205.
48 m
World Bank
IBM
US $33.6 m
p.a
CHF
12.375 m
p.a
DM30.00
m p.a
CHF 200m and DM 300 m March 86
US $ 210 m in March 86
Swiss franc (CHF)
loan
Deutsche
Mark (DM)
loan
Principal, in million 200.00 300.00
Due date for bullet repayment of
the principal
30 March 1986 30 March
1986

Annual interest outflow due March
30
12.375 30
Interest rate 8.00 11.00
Currency swaps are useful in
a) Hedging against exchange rate risk
b) Transforming an asset or a liability from one
currency to another
c) Reducing the financing cost

Indian Firm
US Firm
Dollar
Interest
Rupee
Interest
Rupee
Liability

Rupee
Interest
US Asset
Dollar
Income
Dollar
Liability

Dollar
Interest
Rupee
Income
Indian Asset
Swap transaction
An Indian firm INSO ltd. Wants to acquire a US
firm at a cost of $2 crore. The firm can raise
Rs. 90 crore at 12% (exchange rate of
Rs.45/dollar). The acquisition yields 15%
return.
At same time US firm USNG ltd. Wants to form
a JV in India at cost of $2 crore with return of
15%. It can raise the dollars at 8%
INSO Ltd.
Income in US $ = 15% of $200 lakh = $30 lakh
p.a.
Equivalent value in rupees = Rs. 1350 lakh p.a.
Interest payment = 12% of Rs. 9000 lakh = Rs.
1080 lakh
Anticipated profit = Rs. 270 lakh p.a.
USNG Inc
Income in rupees = 15% of $9000 lakh = Rs.
1350 lakh p.a.
Equivalent value in US dollars = $30 lakh p.a.
Interest payment = 8% of $200 lakh = $16 lakh
p.a.
Anticipated profit = $14 lakh p.a.
year
exhange
rate (Rs./$) Indian firm US firm
income $ equiv Rs. spread Rs. income Rs. equiv $ spread $
5 54 30 1620 540 1350 25 9
4 52 30 1560 480 1350 25.96 9.96
3 50 30 1500 420 1350 27.00 11.00
2 48 30 1440 360 1350 28.13 12.13
1 46 30 1380 300 1350 29.35 13.35
now 45 30 1350 270 1350 30.00 14.00
1 44 30 1320 240 1350 30.68 14.68
2 42 30 1260 180 1350 32.14 16.14
3 40 30 1200 120 1350 33.75 17.75
4 38 30 1140 60 1350 35.53 19.53
5 36 30 1080 0 1350 37.50 21.50
INSO Ltd.
USNG Inc.
$30 lakh
p.a.
Rs. 1350 lakh
p.a.
Rupee Liability
9000 lakh p.a.

Rupee Interest
1080 lakh p.a.
US Asset
$ 30 lakh
p.a.
US Dollar Liability
$200 lakh p.a.

Dollar Interest
$16 lakh p.a.

Rs. 1350 lakh
p.a.
Indian Asset
Swap transaction
cash flows after swap figure in lakh p.a.
INSO ltd. USND Inc.
income earned abroad $30 1350
paid to counterparty ($30) -1350
received from counterparty 1350 $30
interest obligation -1080 ($16)
spread 270 $14
Currency swaps enable financing in a
currency with the lowest interest rate
A cheaper source of finance converts the
interest rate advantage into exchange rate
risk, transforming the asset or liability from
one currency to another, while reducing the
financing cost.

INR Market GPB Market
Indian Firm 10% 6%
British Firm 14% 4%
Advantage to the
British firm
- 4% 2%
Indian Firm British Firm
INR 11%
GBP 5%
INR Principal
GBP Principal
GBP
4%
INR
10%
Indian Firm British Firm
Payment to investors Rupee 10% Pound 4%
Payment to
counterparty
Pound 5% Rupee 11%
Receipt from counter
party
Rupee 11% Pound 5%
Cost of
borrowing(1+2-3)
Pound 4% Rupee 10%