Swaps
The evolution of swaps:
- originally parallel loan agreements
- parties wanted to reduce foreign exchange exposure
- cash flows
- US parent lends $ to UK sub in US, and UK parent lends
£ to US sub in UK. Cash flows to US firm look like the following:
- what does risk exposure look like for US parent?
- problems with parallel loan agreements
- what if other side in trouble down the line?
- balance sheet effect?
Structuring contract to avoid
parallel loan agreement status:
- Is initial exchange of principal necessary?
- What about exchanges at intervening interest payments?
Other types of swaps:
- currency coupon swaps
- interest rate swaps
- basis swap
- oil swap
