Question

(a) Using any two of your own hypothetical examples, critically evaluate any two reasons why investors may use plain vanilla currency swaps. Write out and explain the swaps you have designed.

Answer 1

Plain Vanilla swap is used to hedge floating rate exposire. Both leg are denominated in same currency and payment is netted.

for eg A party goes on fixed side and B party chooses floating rate so Interest is calculated by applying npth rate and net interest pay to other party.

Reasons:

1, If Investor thinks that interest rate will go high, he can choose floating rate and he can take the benefit of increasing rate and vice versa.

2. If one party have to receive payment in future with floating interest rate so to secure he can go for fixed leg and secure himself.

Lets take an example I am an indian and i received salary in USD say $10000. Now every month there is risk that what amount in Rupee i will get so i can go for fixed leg and i can secure myself. So that My risk will be secured.