Currency Swap Market Ewha GSIS 082SIS51 Roh, jeong-hee 2008 International Finance I’m going to present about currency swap market. Currency Swap Market Ewha GSIS 082SIS51 Roh, jeong-hee

WHAT ARE CURRENCY SWAPS? EXAMPLES WHAT IS SWAP? TYPES OF SWAPS WHAT ARE CURRENCY SWAPS? EXAMPLES As far as I know, today class focuses on currency issue and four more students will have presentation about Swap. So, this time I’m going to briefly introduce swap and mainly explain about currency swaps.

1. WHAT IS SWAP? A swap is an agreement whereby two parties (called counterparties) agree to exchange periodic payments. Swaps give investment bankers the ability to create a wide range of securities to meet the objectives of investors. A swap is an agreement whereby two parties (called counterparties) agree to exchange periodic payments. Swaps are derivative instruments that can be used to control risks faced by borrowers and investors. Swaps give investment bankers the ability to create a wide range of securities to meet the objectives of investors.

2. TYPES OF SWAPS INTEREST RATE SWAP INTEREST RATE-EQUITY SWAP CURRENCY SWAP Swaps are classified based on the characteristics of the swap payments. The four types of swaps are interest rate swaps, interest rate-equity swaps, equity swaps and currency swaps. In an interest rate swap, the counterparties swap payments in the same currency based on an interest rate. And in an interest rate-equity swap, one party is exchanging a payment based on an interest rate and the other party based on the return of some equity index. In an equity swap, as you can guess, both parties exchange payments in the same currency based on some equity index.

3. WHAT ARE CURRENCY SWAPS? A currency swap is an agreement between two parties to buy or sell currency (generally) at spot rates, which reverts at the end of an agreed period for a specified price (the forward rate). the process of a currency swap normally also includes a series of recurring payments based on the cash flow performance of the two currencies. ≠ Currency Exchange A currency swap is an agreement between two parties to buy or sell currency (generally) at spot rates, which reverts at the end of an agreed period for a specified price (the forward rate). Along with the initial exchange of a specific amount of one currency for a specific amount of a different currency, the process of a currency swap normally also includes a series of recurring payments based on the cash flow performance of the two currencies. This makes a currency swap somewhat different from a currency exchange, in that the exchange normally involves simply exchanging currency at the most recent rate of exchange.

the swapping of the currency is not a permanent component. The recurring payments that compose the second phase of a currency swap normally make use of both fixed and variable rates of interest. the swapping of the currency is not a permanent component. The recurring payments that compose the second phase of a currency swap normally make use of both fixed and variable rates of interest. One party will agree to pay a fixed interest rate, while the second party will make interest payments based on a floating rate of exchange. However, it is possible to arrange a currency swap agreement where both parties pay recurring payments based on a fixed rate or a floating exchange rate. The final determination of how the interest rate will be calculated is defined in the terms and conditions that govern the swap. One important aspect of the currency swap that also sets it apart from currency exchanges is the fact that the swapping of the currency is not a permanent component. At the time that the two currencies are swapped, the parties agree to make the recurring interest rate payments for a specific period of time. Once the duration outlined in the agreement is complete, the two currencies are returned to the original owner. (However, each party retains all returns that were shared in the form of interest payments.) Now, we’re going to watch a video clip about the currency swap, especially fixed-rate currency swap. Running time is about 2 and half minutes. http://kr.youtube.com/watch?v=Ey5nulQ-xzU

4. Examples SF 6.35 million Or 5% All-Swiss Watches Regency Electronics Corporation All-Swiss Watches Corporation $7 million Or 7% The two counterparties to currency swap agreement are the Regency Electronics Corporation (a U.S. manufacturing firm), for example, and the All-Swiss watches Corporation (a Swiss manufacturing firm). The notional amount is $100 million and its Swiss franc equivalent at the time the contract was entered into was SF217 million. Every year for the next 5 years the U.S. manufacturing firm agrees to pay all-Swiss watches Swiss francs equal to 5% of the Swiss franc notional amount, or SF 6.35 million. In turn, the Swiss manufacturing firm agrees to pay regency electronics 7% of the U.S. notional amount of $100 million, or $7 million. The transaction of a currency swap is usually utilized when there is some expectation that the two currencies in question have potential to realize a significant amount of return via the rates of interest accrued. As can be expected, both parties usually anticipate realizing a higher return with the currency type that is received in the swap. However, since rates of exchange tend to fluctuate over time, there is usually a reasonable chance that both parties ultimately benefit from the currency swap.

Bank of Korea, U.S. Fed agree on currency swap Under the currency swap agreement, the BOK will deposit money in Korean won in the Federal Reserve Bank for a certain period of time and take out U.S. dollars. The latest currency swap agreement was aimed at improving the global financial market’s liquidity problems and helping those countries with solid economic fundamentals overcome difficulties in securing dollar liquidity. Korea will be able to secure supplies of up to US$30 billion from the United States in exchange for deposits in won. Oct. 30, 2008 From Bank of Korea <Bank of Korea, U.S. Fed agree on currency swap> Korea and the United States have signed a currency swap agreement. Under the currency swap agreement, the BOK will deposit money in Korean won in the Federal Reserve Bank for a certain period of time and take out U.S. dollars. The BOK will withdraw the won after paying the dollars back upon maturity of the contract. (Apr. 30, 2009) The latest currency swap agreement was aimed at improving the global financial market’s liquidity problems and helping those countries with solid economic fundamentals overcome difficulties in securing dollar liquidity. As a result of this agreement, Korea will be able to secure supplies of up to US$30 billion from the United States in exchange for deposits in won.

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