FOREIGN EXCHANGE SWAPS
A basic foreign exchange swap is the simultaneous purchase and sale of one currency for another, where the two contracts have different dates (different positions of same or different amount on different dates).
Let’s study the following illustration. An export oriented corporate enters a FCS with the following terms.
Under the above mentioned terms, the corporate pays US 6months LIBOR to the bank and receives 11.00% p.a. every 6 months on 1st January & 1st July, till 5 years.
Hence, the corporate, who would earlier have to pay fixed Rupee interest on his Rupee borrowings, has now converted the same into a USD floating rate borrowing. Hence, if the Corporate’s original Rupee borrowing is done at 12.00% p.a., it has converted the same into 6 months LIBOR + 1.00% (under the FCS, it would receive only 11.00%), effective borrowing. Such kind of structures are useful for corporates having USD income, hence it would stand to reduce its cost as it pays USD interest rates.
INTEREST FLOWS
On every 1st January and 1st July, the corporate receives from the swap bank 11.00% of Rs. 47 cr. X (6 / 12) = Rs. 2.59 cr. The corporate, in turn pays the 6 month USD LIBOR on USD 10 million. Suppose on the first reset date, such rate is USD 5.00%. Then the corporate pays 5.00% of USD 10 million in Rupee terms, converted at the then prevailing exchange rate, which if in the e.g. is Rs. 48.00 / USD, the interest amount payable by the corporate would be (10,000,000 X 5.00% x 0.5) X 48.00 = 1.20 cr. In effect, the corporate receives 1.39 cr. This continues on every interest payment dates till the maturity of the swap.
A basic foreign exchange swap is the simultaneous purchase and sale of one currency for another, where the two contracts have different dates (different positions of same or different amount on different dates).
Let’s study the following illustration. An export oriented corporate enters a FCS with the following terms.
Under the above mentioned terms, the corporate pays US 6months LIBOR to the bank and receives 11.00% p.a. every 6 months on 1st January & 1st July, till 5 years.
Hence, the corporate, who would earlier have to pay fixed Rupee interest on his Rupee borrowings, has now converted the same into a USD floating rate borrowing. Hence, if the Corporate’s original Rupee borrowing is done at 12.00% p.a., it has converted the same into 6 months LIBOR + 1.00% (under the FCS, it would receive only 11.00%), effective borrowing. Such kind of structures are useful for corporates having USD income, hence it would stand to reduce its cost as it pays USD interest rates.
INTEREST FLOWS
On every 1st January and 1st July, the corporate receives from the swap bank 11.00% of Rs. 47 cr. X (6 / 12) = Rs. 2.59 cr. The corporate, in turn pays the 6 month USD LIBOR on USD 10 million. Suppose on the first reset date, such rate is USD 5.00%. Then the corporate pays 5.00% of USD 10 million in Rupee terms, converted at the then prevailing exchange rate, which if in the e.g. is Rs. 48.00 / USD, the interest amount payable by the corporate would be (10,000,000 X 5.00% x 0.5) X 48.00 = 1.20 cr. In effect, the corporate receives 1.39 cr. This continues on every interest payment dates till the maturity of the swap.