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Good day Tutor!!.
I’m little bit confused in currency swap.
First of all I will tell you what I understand about currency swap and ask you if it is correct or not and if it is correct then why it is called CURRENCY swap.So, for instance, I live in Pakistan and you live in UK. I found an investment opportunity in UK of 1,000 GBP and you found in Pakistan of 100,000 PKR. But there is a risk of exchange rate which could affect on our profit and repayment of loan. Spot rate is 100 GBP for 1 PKR.
You approach me and said ” Yousha, kindly borrow 100,000 PKR on my behalf and invest in the opportunity which I have found in Pakistan then pay interest and earn profit regularly on my behalf then repay the loan after the end of investment and I will do the same for you in UK”.
If the scenario above is the perfect example of currency swap, then why it is called CURRENCY swap and not INVESTMENT swap ?
Because we swapped each other investments opportunity.And if above example is not the perfect display of currency swap then please explain it with examples and tell why it is called currency swap.
Thank you!!
Currency swaps are a way of reducing the interest payable on borrowings but are not examinable until Paper AFM.
You can read this if you want to:
P4 was the exam before it became APM
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