Question

Please write and paraphrase ‘ Advantages and Disadvantages of Swaps contract method . (150 words )

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Aab automa Head 2017, p. 12). (2) (a) Critical evaluation of method (A) Currency swaps Currency swaps are generally used to access a cheaper source of financing in the desired foreign currency without having to access foreign capital markets. A higher cost of debt for a fim in a foreign capital market is frequently higher than the cost of debt that can be achieved by a local firm. The advantage of a currency swap is that there are no upfront costs. The disadvantage is that the firm is often exposed to the risk of default, not only on the principal amounts but also on any interest payments, If such payments are involved (Nzioka, 2017, p. 15). The simplest currency swap involves the exchange of only the notional amount with the other counterparty at a specified point in the future at a rate agreed now. This type of currency swap performs a function comparable to a forward or future contract. The cost of finding a counterparty and drafting of the terms with them, mostly done through a financial intermediary, often makes swaps more expensive than other derivatives International Finance forwards provide leverage and therefore with futures it is possible to hedge a big amount with a smaller outlay (Alvarado-Vargas, 2013, p. 11) (3) Conclusiorl

Answer 1

Swap is a derivative contract through which two parties exchange their cash flows through two different financial instruments. Usually principal doesn't change hands, only the cash flows are exchanged. One cash flow is generally fixed while other is variable based on various currency exchange rates.

Most common type of swap is interest rate swap in which a person with variable interest rate swaps with the one having fixed exchange rate. The one paying fixed rate And getting variable rate in return will pray for increase in exchange currency rate on exchange (LIBOR / MIBOR). if it visualize rate to decrease. It will swap uts variable one to the fixed one.

Another swap is currency swap in which both currency as well as interest is exchanged. It takes between two different countries with different currency..