Question

Suppose that you borrowed 10 million Japanese yen for one year. is your foreign exchange risk? Describe how forwards, futures, options, and swaps can be used to hedge your foreign exchange risk. What is the difference between an interest rate swap and a currency swap?

Answer 1

Answer

Yes borrowing a 10 million japanese which is a foriegn currency is a exchange risk because when i accept the payment ,I am bearing the risk that this foreign japanese yen will depreciates and i will recieve a few US dollars once the japanese currency is converted back in to the dollar because of the changes in the exchange rates.here inborrowing japanese yen i will have to deal with the transaction risk which is a type of foreiogn exchange risk .In this situation i can use forwad currency swap or currency swap forward contract which is risk management technique or way .Also many of the funds hedge the currency risk using this forward contract .It allow the purchaser to basically lock in the cost or price they pay for a certain amount of currency.With this i will be able to set in place the exchange rate for one year .

between two parties the swaps are dervative which involve the flow of cash.The interet rate swap involves the exchange of the interest payments,while in the currency swap , there is a involvement of exchange of cash in one currency for the same quantity or amount of another currency .

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