instruments in interest-rate, currency and ... - Volksbank AG

Typical cross currency swapsnIn the case of the fixed-fixed currency swap, fixed interest payments are paid and received indifferent currencies.nIn the case of the floating-floating currency swap (basis swap) floating rate interest is paid and received onprincipal amounts in two different currencies.nCombined cross currency swaps are able to swap fixed and variable interest payments in twodifferent currencies.ExampleLiabilities side – from the floating rate EUR loan into a JPY fixed interest loan (EUR floating against JPY fixed)A good example for a ”basic loan” is a floating interest-rate loan (roll over loan) in the local currency (EUR),because the best terms and conditions are usually available in this instance, offers can be directly compared on acredit margin basis using the EURIBOR and restructuring with a swap or a hedge with cap (cf. chapter interestrateoptions) is easy to arrange. With a cross currency swap, swapping the floating EUR rate of interest to a fixedrate of interest in a foreign currency, a fixed interest loan is created in the chosen low interest-rate currency. Therisk of the floating rate of interest is thus hedged. The foreign exchange risk can be limited better by being ableto terminate it at any time (by terminating the swap and valuation at the market conditions prevailing at thatparticular time).For this cross currency swap, the company gets a floating EUR rate and pays a JPY fixed interest rate to VBAG.With this variable rate, the company services the EURIBOR payments resulting from the R/O loan.As both variable interest payment flows balance out on the roll over dates, this transaction results in a foreigncurrency loan with a fixed interest rate over the full term of the swap.”Basic financing“: a company pays EURIBOR + 100 BP on an R/O EUR loan.Cross currency swap: The company receives EURIBOR +100 BP from VBAG. The company pays VBAG a JPY fixedinterest rate (about 100 BP above current market level).Foreign currency: Instead of the initial exchange and the final exchange, Group Treasury executed both conversions(initial and final). The JPY nominal amount is sold in the market at the beginning of the cross currency swap, withthis initial rate being crucial for the success of the foreign currency financing, and should occur when the foreigncurrency (JPY) is standing as high as possible against the local currency (EUR). The foreign currency amountreceivable by VBAG from company is also subject to this initial rate. In the event that the JPY/Euro rate drops (i.e.EUR/JPY rises), the foreign exchange gain can be realised by terminating the swap or hedge (forward exchangetransaction).Result: The company pays a JPY fixed interest rate.19