Question

PLEASE NOTE: I posted this question before and I was not satisfied with the answer. Please do not copy and paste that answer. The expert failed to provide an example. Here is the question:

Give an example to explain why a US company might wish to enter into a fixed rate currency swap, paying Euros and receiving fixed- rate Sterling.

Answer 1

A US company which might be importing raw materials from United Kingdom would have payment liabities in Sterling pounds. Also if that same company sells primarily in Euro region then it earns in Euros as well.
So for this company it is exposed to currency exchange risk of US Dollar versus Sterling as well as US Dollar versus Euro. Now if it can make translate variable Sterling exposure to variable euro exposure and receive fixed sterling, then it makes sense as this variable Euro liability gets balanced through earnings expected in Euro through sale of its goods. Through doing this swap, it is also able to receive fixed rate Sterling pound which it can then use to pay its suppliers.