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Hello John,
In part b of Q2 of SD 2020 exam,it is asked that how a company can overcome restrictions on dividends & remittance from its foreign subsidiary. In the second para of answer, examiner mentioned loans and currency swaps. Can u plz explain how these can help in overcoming the restrictions?
Thanks.They could take out a loan in Canvia, convert the money borrowed to Euros, and use the money that was available for dividends to pay the interest on the loan.
Alternatively they could borrow money in Euros, swap it for a loan in Canvia Lira and so pay the interest in CL.
I didn’t got your second point clearly.
Also why it says there’ll be counter party risk in both cases? As they’ll enter into a swap or loan agreement with their own subsidiaries?The swap will be with another company not with a subsidiary (see our notes on currency swaps). Instead of remitting dividends, the money is used to pay somebody else’s interest in Canvia, and the somebody else pays the interest on our loan in Euros.
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