To lower financing cost
Currency swaps can be used to reduce the cost of loan. The following example deals with such a case.
Consider two Indian corporates A & B. Corporate A is an exporter with a rupee loan at 14% fixed rate.
B has a dollar loan at LIBOR + 0.25% floating rate.
Due to difference in the credit rating of the two companies, the rates at which the loans are available to them are different.
A has access to 14% rupee loan and dollar loan at LIBOR + 0.25%.
A would like to convert its rupee loan into a dollar loan, to reverse its revenue in dollars and B would like to convert the dollar loan into a fixed rupee loan thus crystallizing its cost of borrowing.
They can enter into a swap and reduce the cost compared to what it would have been if they had taken a direct loan in the desired currencies.
Currency swaps can be used to reduce the cost of loan. The following example deals with such a case.
Consider two Indian corporates A & B. Corporate A is an exporter with a rupee loan at 14% fixed rate.
B has a dollar loan at LIBOR + 0.25% floating rate.
Due to difference in the credit rating of the two companies, the rates at which the loans are available to them are different.
A has access to 14% rupee loan and dollar loan at LIBOR + 0.25%.
A would like to convert its rupee loan into a dollar loan, to reverse its revenue in dollars and B would like to convert the dollar loan into a fixed rupee loan thus crystallizing its cost of borrowing.
They can enter into a swap and reduce the cost compared to what it would have been if they had taken a direct loan in the desired currencies.