Though swaps can be used in the above conditions effectively, corporates need to look at a few factors before deciding to swap.
The estimated net exposure
They need to estimate the net exposure that they are likely to have in the future. Projecting the growth in exports/ imports, taking into account the changes in management and government policies can do this.
Expected range of exchange rates
This can be determined by a fundamental and technical analysis. For fundamental analysis one needs to keep track of the balance of payment condition, GDP growth rate, etc. of the country. The technical factors look at past trends and expected demand-supply position. Other factors like political stability also needs to be considered.
Expected interest rates
Since currency swaps include exchange of interest payments, the interest rates also need to be traced. By keeping an eye on the yield curve of long term bonds and the macro economic variables of different countries, the interest rates can be estimated.
Amount of cover to be taken
Having estimated the amount of exposure, the expected exchange rates and the interest rates, the parties can determine the risks involved and can decide upon the amount of cover to be taken.
This shall depend on the management policy whether they believe in minimizing the risk for a given level of return or maximizing the gain for a given level of risk.
The risk taking capability of a corporate will depend upon the financial backup to absorb the losses, if any, the availability of time and resources to monitor the forex market.
The estimated net exposure
They need to estimate the net exposure that they are likely to have in the future. Projecting the growth in exports/ imports, taking into account the changes in management and government policies can do this.
Expected range of exchange rates
This can be determined by a fundamental and technical analysis. For fundamental analysis one needs to keep track of the balance of payment condition, GDP growth rate, etc. of the country. The technical factors look at past trends and expected demand-supply position. Other factors like political stability also needs to be considered.
Expected interest rates
Since currency swaps include exchange of interest payments, the interest rates also need to be traced. By keeping an eye on the yield curve of long term bonds and the macro economic variables of different countries, the interest rates can be estimated.
Amount of cover to be taken
Having estimated the amount of exposure, the expected exchange rates and the interest rates, the parties can determine the risks involved and can decide upon the amount of cover to be taken.
This shall depend on the management policy whether they believe in minimizing the risk for a given level of return or maximizing the gain for a given level of risk.
The risk taking capability of a corporate will depend upon the financial backup to absorb the losses, if any, the availability of time and resources to monitor the forex market.