Currency swap

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The currency swap ( English cross currency swap or English currency swap ) is a swap in finance , in which the counterparties exchange two different currencies . The opposite is the interest rate swap .

General

The temporary exchange of two currencies aims to eliminate the currency risk with foreign currency debts or foreign currency loans or to change the composition of the credit portfolio . It thus serves to compensate for risks , is part of the hedging transactions and is a risk management tool .

species

Either fixed interest rates in different currencies ( pure currency swap ; English fixed / fixed currency swap ) or variable interest rates in different currencies ( base currency swap ; English floating / floating currency swap ) are exchanged. In addition, the currency swap can with an interest rate swap combined ( interest currency swap ; English cross currency interest rate swap ) having the exchange of fixed rates for variable interest rates in different currencies to the object. One currency has a fixed interest rate, the other a variable rate.

The counterparty who buys a higher- interest currency by cash purchase and sells it again by forward sale pays the other party the interest difference , known as a deport or report . All types of currency swaps can therefore also eliminate or reduce existing interest rate risks .

With terms of more than two years, currency swaps are a real alternative to currency forwards due to their greater market depth ( market liquidity ) and a smaller number of transactions .

Legal issues

For reasons of legal certainty , currency swaps are usually concluded within framework agreements. The master agreement established by the International Swaps and Derivatives Association (ISDA) in 1992 is customary internationally . In Germany, the German framework agreement is also used for financial futures .

Swap transactions are concluded on the foreign exchange market either through direct negotiations between potential contract partners or through the intermediary of credit institutions as contractual partners . Banks play an important role in swap trading because they can act as financial intermediaries on the one hand and act as counterparties on the other . If the bank is an active partner in the swap transaction, it takes on a position in a corresponding swap transaction at its own risk and tries to realize the associated advantages. If the bank now acts as an intermediary, a distinction must be made between open and anonymous intermediation. In the case of open mediation, the bank brings the two partners together for a planned swap transaction and they then negotiate with one another, whereby the bank can provide advice. The risks entered into with this swap transaction are borne exclusively by the two parties involved. In the case of anonymous brokerage, the swap partners conclude their contracts with the bank, which then, as the party involved, also has to bear the risk of default . This may reduce the credit risk and make it easier for the swap partners to assess. An anonymous brokerage of a swap is therefore particularly interesting for swap partners if there are differences between the creditworthiness of the two market participants involved in the swap transaction .

Applications

Is a classic application of a currency swap, two counterparties from borrowings coming amounts in two different currencies, as well as during the repayment term payable to debt service ( interest on loans and repayments ) exchange among themselves. The reason for this lies in the comparative interest rate advantages that one or both counterparties have in the currency sought by the counterparty .

The exchange takes place either through a spot transaction and a forward transaction or through two forward transactions with different maturities. The swap therefore contrasts different maturities with one another. With a currency swap, each counterparty pays the agreed interest during the term. The redemption takes place when due at the spot rate on the trade day. The reason for this is that the different interest rates, which cause the deviations from the spot rate in the futures transaction, are already taken into account by exchanging the interest obligations.

One of the first known currency swaps was the one concluded in 1981 between IBM and the World Bank . Here, IBM (in fact) performed the future debt service of the World Bank for US $ Eurobonds , while the World Bank for its part (in fact) took over the debt service of IBM for its liabilities in DM and Swiss francs . This enabled IBM to secure the book profit from a rise in the US dollar exchange rate, while the World Bank was able to expand its foreign currency debt without using the German or Swiss capital market.

In 1995 Italy used currency swaps to join the monetary union . At the time, it was suspected that other countries were also using swaps to meet the Maastricht criteria . Currency swaps entered into by Greece in 2001, which later turned out to be detrimental to the country, helped to mask the actual Greek national debt . A currency swap deal concluded with Goldman Sachs allowed Greece to borrow more than 2.8 billion euros. With the help of fictitious exchange rates, around two percent of the Greek national debt was not shown in the national budget with this transaction .

Demarcation

The currency swap is to be distinguished from the currency swap . In contrast to the foreign exchange swap, the two currencies are exchanged at the respective spot exchange rate at the beginning and at the end of the term . In the case of the currency swap, the existing interest rate difference is balanced out during the term of the financial contract through corresponding payments (fixed interest rate by one counterparty, variable interest rate by the other). In the case of a foreign exchange swap, the nominal amounts are exchanged without the associated interest obligations; rather, this is done through a one-off payment of the deport or report.

literature

  • C. Graf von Bernstorff: Financial innovations: possible applications, strategies, examples. Gabler, Wiesbaden 1996.
  • R. Eller: Derivative Instruments - Overview, Strategies, Trends. In: R. Eller (Ed.): Handbook of Derivative Instruments. Schäffer-Poeschel Verlag, Stuttgart 1996, pp. 4-38.
  • P. Fischer-Erlach: Trading and price formation on the foreign exchange market. 5th, revised and expanded edition. Kohlhammer, Stuttgart et al. 1995.
  • JC Hull: Options, Futures, and Other Derivatives. 3. Edition. Prentice Hall International, London et al. 1997.
  • P. Lerbinger: Interest rate and currency swaps: new instruments in the financial management of companies and banks. Gabler, Wiesbaden 1988.
  • GW Mehring: Interest and currency management in the company. Economia, Bonn 1996.
  • K. Redhead: Financial derivatives: an introduction to futures, forwards, options and swaps. Prentice Hall, London et al. 1997.

Individual evidence

  1. ↑ Rolfjosef Hamacher, VAT treatment of new financial instruments , in: Die Bank, 1989, p. 666
  2. ^ Andreas Fülbier, Civil Law Classification of Interest Rate and Currency Swaps , in: ZIP, 1990, p. 544
  3. ↑ Wolfgang Grill / Ludwig Gramlich / Roland Eller (eds.), Gabler Bank Lexikon: Bank, Börse, Zusammenarbeit , Volume 1, 1996, p. 372
  4. ↑ German Institute for Internal Auditing (Ed.), Working Group on the Revision of the Lending Business, specialist articles on the revision of the credit business , 2002, p. 56
  5. ↑ Helmut Lipfert , International Foreign Exchange and Money Trading , 1969, p. 137
  6. ↑ Helmut Lipfert, International Foreign Exchange and Money Trading , 1969, p. 57
  7. ↑ Helmut Grothe, Foreign Currency Liabilities , 1999, p. 64
  8. ↑ Lutz Krämer, Finanzswaps und Swapderivate in der Bankpraxis , 1999, p. 86
  9. ↑ Jan Scheffler, Hedge Accounting: Annual Financial Statements Risks in Banks , 1994, p. 43
  10. ↑ Lutz Krämer, Finanzswaps und Swapderivate in der Bankpraxis , 1999, p. 12
  11. ↑ How Italy shrank its deficit @Euromoney. In: euromoney.com. February 10, 2010, accessed January 2, 2015 .
  12. ↑ Satyajit Das: Traders, guns & money: knowns and unknowns in the dazzling world of derivatives. Pearson Education, 2006, ISBN 0-273-70474-5 , p. 107. ( limited preview in Google Book Search)
  13. ↑ Bloomberg Business, March 6, 2012, Goldman Secret Greece Loan Shows Two Sinners as Client Unravels , accessed June 24, 2015
  14. ^ Christoph Graf von Bernstorff, Finanzinnovationen , 1996, p. 141
  15. ^ Christoph Graf von Bernstorff, Finanzinnovationen , 1996, p. 143
  16. ↑ Norbert Horn / Ernst Heymann (eds.), Commercial Code (excluding Maritime Law): Commentary , Volume 3, 1999, p. 184