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- This topic has 1 reply, 2 voices, and was last updated 7 years ago by John Moffat.
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- April 21, 2017 at 10:32 am #382943
On page 396, BPP textbook F9 mentions one of the benefits of currency swaps is “The company can gain access to debt finance in another country and currency where it is little
known, and consequently has a poorer credit rating, than in its home country. It can therefore take advantage of lower interest rates than it could obtain if it arranged the currency loan itself”.I doubt the validity of this benefit of currency swaps, as if a currency have a poorer credit rating, it must be charged a higher interest rate to compensate for a higher risk. Therefore, it’s better to make a loan on its own currency rather than make loan on another currency with poorer credit rating. Maybe it has to be corrected as follow: ” The company can gain access to debt finance in another country and currency where it is well known, and consequently has a better credit rating, than in its home country. It can therefore take advantage of lower interest rates than it could obtain if it arranged the currency loan itself”!
April 21, 2017 at 4:22 pm #382989I think you have misread the statement, because it is perfectly true and is the whole reason for considering a swap!
It has nothing at all to do with the credit rating of the currency (whatever that may mean). It is related to the credit rating of the company.
Suppose I am in the UK and you are in the US, and I want to borrow $’s (because I intend to invest in the US and so need US dollars) and you want to borrow in UK pounds (because you want pounds so as to invest in the UK).
I can borrow in the UK at lower interest than you can, because I am a UK company and have a better credit rating in the UK than you do.
You can borrow in the US at lower interest than I can, because you are in the US and have a better credit rating in the US than I do.So I borrow UK pounds, you borrow US dollars (both borrowing at lower interest rates than we could do if we borrowed what we actually want) and then we swap. That way we can both save!! 🙂
(Have you watched the free lectures on swaps and read the free lecture notes – both available on this website?)
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