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

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Some apps could automatically update Heading 2 Tide ubde Emph. No Spacing Heading1 (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 firm in a foreign capital market is frequently higher than the cost cf 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) Conclusion

Answer 1

Swap is a type of financial instrument which is generally used to exchange the stream of Cash flow in order to reduce the risk. Like exchanging fixed interest rate with floating interest rate if there is chances of interest rate to rise or fall in case of investment or borrowing.

Advantages of swap contract are :-

1 . Swap can be used to hedge the risk even long time period hedge is possible.

2 . Swaps are generally considered to be cheaper sourchse of hedging risk as there is no upfront premium to be paid which reduces transaction cost.

3 . The term of swap is generally longer than futures and options. Swapn contract arrangement can run for years while forward contracts and futures are for shorter duration only.

4 . It provides the flexibility to the company to mould stream of Cash flows as per it's suitability

There are also certain disadvantages of swap which are described below as follows :-

1. It should be noted that early termination of swap contract from it's maturity may incur breakage cost.

2. This financial instrument lacks in terms of liquidity.

3 . Default risk is always on a higher side in case of swap contract.