Question

Why would a company use currency swaps?

Answer 1

Companies use currency swaps due to the following reasons:

1.The primary reason for usage of currency swaps by the companies is to cover the risk occurring due to fluctuations in exchange rates.

2.Currency Swaps enable the company to borrow in a country providing better capital opportunities and funding requirements

3.The cost of capital can be effectively lowered by using the currency swaps.

4. Companies can hedge risks using them by shifting from Floating Rate to Fixed Rate of interests. There is a notional exchange of principal in between the parties.

5. Companies pay only the interest payments to each other when notional principals are exchanged & thus, currency risks are also mitigated.