Currency swaps - part 1

In this lesson

1. 0:00 Currency swaps introduction
2. 0:49 How swaps work four main stages
3. 2:17 Why companies use swaps
4. 5:23 Counterparty risk and drawbacks
5. 6:11 Forward contract versus swap comparison
6. 11:02 Swaps calculation five key steps

About this lesson

This lesson covers the four-stage mechanics of a swap arrangement, explores when swaps are preferable to forwards and futures, and introduces the five-step calculation process for determining swap gains and cash flows. Understanding currency swaps is essential for FM, AFM, and strategic papers where you'll encounter complex hedging scenarios involving multi-currency exposures and counterparty considerations. This is challenging material, so the lesson builds your confidence by starting with practical scenarios before moving into calculations. You'll see why borrowing in your home currency and swapping interest payments can be cheaper than direct foreign borrowing, and how matching foreign assets with foreign liabilities creates a natural internal hedge against economic risk. The session also highlights the trade-offs: while swaps reduce long-term exchange rate exposure, they introduce counterparty risk—the possibility your swap partner fails to meet their obligations. By the end, you'll understand the five calculation steps needed to work through a swap question: determining the comparative advantage gain, splitting that gain between parties, arranging the initial loans, calculating each company's net position after the swap, and finally structuring the cash flows. The numbers are fiddly and multi-stage, but mastering this approach will equip you to handle the toughest hedging questions on your exam.

Duration: 13m