The combination of spot transaction nd forward transaction is called swap transaction.vry.well explained sir bt.as a professional I feel in a swap transaction, currencies r temporarily exchanged between traders.This means a trader can buy currencies using a spot transaction nd sell the same currency thru a forward transaction.A contract in which a double reversing forward transaction is done nd which is called as forward forward swap transaction in FT in my opinion.A swap margin varies according to the currencies forward discount nd forward premium.Thus the bid askspread has the least value for spot transaction among all transactions in my opinion in nut shell in international business.Vry nice md useful Lecture.Thanx
It seems a lot of people here are confused as to why company A has an absolute comparative advantage.From what I understand we should not be comparing the 8% domestic rate with the 7% foreign rate. Instead, compare the 7% foreign rate it would have had to pay with the 6% it actually pays. Same in the case of company B, compare the 9% it would have had to pay with the 8% it actually has to pay. Essentially each firm is taking advantage of the fact that the other firm can borrow locally at a lesser rate.Correct me if I'm wrong
8:00 I don't understand the example. Company A does not have Euros, only Dollars. If Company A wants to pay the Swap Bank a Euro 6% interest, it needs to first exchange its Dollars to Euros, putting it at an exchange rate risk. So, what's the point of this, then?
i have the same doubt which confuses me. However, looking at the other comments, i believe that the 2 parties would have "swapped" the loans denominated in their own currency at the start of the swap.
Note that at the end, company A from USA will have to make principal repayment of €40M. How will they make that repayment of principal amount in € if they can't even make smaller interest payments in €? The answer is that they are expected to do so by using their Euro proceeds in that foreign country. Otherwise they will be exposed to exchange rate risk. Using $ to pay for interest payments once in a while (by exchanging them for €) does not make that much difference. Instead if this becomes the norm, currency swap will be rendered useless.
They are only exposed to fx risks if their business abroad does not generate positive cashflow from operations to actually pay the debt in the respective local currency.
For company A borrowing in euros costs him 7% whereas for company B borrowing in euros costs him 6%, 6% is better for company A. Thus it enters into the swap.
Thank you. I have a question though on the payment side. How and when does the actual delivery of 40m euro happen. The whole intent was to make 40m euro available to US firm in France.
Is the Company A and Company B need to exchange?Company A is the french company ,Company B is the US company because I thought is the french company that want borrow 52million USD dollar but why it end up borrow 40 million euro
I'm sorry, but can you clarify something? How can US firm pay to the Swap Bank 6% euros if this firm requires euro and did not had it before? So as EU firm is paying to the SB interest in $, but from where? And how did these firms exactly get required currencies in required amount?
Nice video! Question! In the example you provide there is no spread? so therefore the SWAP bank doesent make any money? correct? There will be a spread in reality right?
but what if these two companies need a slightly different amount of money borrowed? why would company A be interested in borrowing $52mln when it only needs $51,7mln for example? I don't think these SWAP banks are always able to find an exact match when two companies need the same amount of money
Are there any possible scenarios where the swap might go wrong due to changing interest rates for any of the currencies or if the currency rate itself changes?
Sir my question is if swap Bank charge 1% charge for both firm transaction or if some other x% charge on tax then advantage of currency swap get cancelled ?
the main principal amount is set at the time of the contract. In a currency swap, the principal to be paid at maturity in one currency is equal to the principal expressed in the other currency * the exchange rates at the time of maturity.
If the bank takes say 1/4%, then for example, Firm B might pass 8.25% to the bank and the bank passes 8% to Firm A, which will leave the bank with 1/4%, and B paying 1/4% more. Likewise, A could send the bank 6.25% and the bank only passes 6% to B. Here the bank gets some of the gains from the swap and both A and B pay a little more. However, both A and B are still better off than without the swap.
This is by far the clearest video on this subject. That diagram with the currency interest rates was phenomenal! Thank you!
can't understand a single word from my South American professor and here I am, thank you so much, sir.
i've watched a number of videos on this subject and yours is the only one that actually explains how it works and why they'd do it. Thank you, sir!
Sir, your videos are excellent. Simply the best videos - wish I hadn't purchased textbooks and simply watched all your videos first.
Brilliantly clear explanation! Thank you sir!
The combination of spot transaction nd forward transaction is called swap transaction.vry.well explained sir bt.as a professional I feel in a swap transaction, currencies r temporarily exchanged between traders.This means a trader can buy currencies using a spot transaction nd sell the same currency thru a forward transaction.A contract in which a double reversing forward transaction is done nd which is called as forward forward swap transaction in FT in my opinion.A swap margin varies according to the currencies forward discount nd forward premium.Thus the bid askspread has the least value for spot transaction among all transactions in my opinion in nut shell in international business.Vry nice md useful Lecture.Thanx
Superb explanation sir. The 10 minutes video cleared all my basic doubts regarding currency swaps. Thank you so much.
You very well made it so crystal clear.
Sir! you are the best. You made life easy. Thanks for this video. Lots of love from Tanzania, East Africa.
Clarity at the best level. Thanks
Great Vid!
Very good and funny videos bring a great sense of entertainment!
Very good explanation. So clear with the concept. Thanks
currency swap not easy to understand, till you have practical experience. but this video is very good. much clearer than others
thank you for posting this, helped me visualize the concept very well
Even though it’s obvious, but instructor should still mention that principal swapped at the inception and swapped back at the end of the swap.
Its not obvious to me lol please could you elaborate? When does the US firm actually receive 40m euros?
I've seen a couple of videos, but this one is very easy to understand even English isn't my main language. Thank you very much!
It seems a lot of people here are confused as to why company A has an absolute comparative advantage.From what I understand we should not be comparing the 8% domestic rate with the 7% foreign rate. Instead, compare the 7% foreign rate it would have had to pay with the 6% it actually pays. Same in the case of company B, compare the 9% it would have had to pay with the 8% it actually has to pay. Essentially each firm is taking advantage of the fact that the other firm can borrow locally at a lesser rate.Correct me if I'm wrong
Thank You !!!
You made it real simple to understand :)
Please upload more videos like this on various financial products.
Very beautifully explained, many thanks for clearing up my doubts. Will save this video for revisit some later time too.
Great content. Finally someone explained it in an understanding way.
Thanks sir! Super galing! 😊
Why does company A has an absolute advantage borrowing dollars and not Euros?
Thank you so much for your clear explanation! It helped me a lot!
Simple explanation. Loved it.
Thank you. You have the best explanation in terms of this subject :)
superb and best detailed xplanation of currency swaps
Thank you so much for this video! It has made the concept really clear for me
Of course, the best currency swap is virtually any national currency for physical silver and gold.
hi so even after CCS the firm is still exposed to exchange rate risk because the stream of payments are still in foreign currency?
8:00 I don't understand the example. Company A does not have Euros, only Dollars. If Company A wants to pay the Swap Bank a Euro 6% interest, it needs to first exchange its Dollars to Euros, putting it at an exchange rate risk. So, what's the point of this, then?
i have the same doubt which confuses me. However, looking at the other comments, i believe that the 2 parties would have "swapped" the loans denominated in their own currency at the start of the swap.
Note that at the end, company A from USA will have to make principal repayment of €40M. How will they make that repayment of principal amount in € if they can't even make smaller interest payments in €? The answer is that they are expected to do so by using their Euro proceeds in that foreign country. Otherwise they will be exposed to exchange rate risk. Using $ to pay for interest payments once in a while (by exchanging them for €) does not make that much difference. Instead if this becomes the norm, currency swap will be rendered useless.
They are only exposed to fx risks if their business abroad does not generate positive cashflow from operations to actually pay the debt in the respective local currency.
how does company A have a comparative advantage in borrowing in dollars the interest rate is higher than the euro interest rate.
Because B has an higher interest rate for borrowing in DOLLARS. so comparatively to the dollar, A has an advantage
I had this question too!
For company A borrowing in euros costs him 7% whereas for company B borrowing in euros costs him 6%, 6% is better for company A. Thus it enters into the swap.
IM SO CONFUSED!!!
How can the company A be at absolute advantage if the domestic borrowing rate is higher ?
I'm latino and even I could understand this, thank you very much!
Thank you. I have a question though on the payment side. How and when does the actual delivery of 40m euro happen. The whole intent was to make 40m euro available to US firm in France.
Is the Company A and Company B need to exchange?Company A is the french company ,Company B is the US company because I thought is the french company that want borrow 52million USD dollar but why it end up borrow 40 million euro
At the inception, principal is swapped. So B got 52 million USD.
@@utubeddong and A got the 40 million EURO?
I'm sorry, but can you clarify something? How can US firm pay to the Swap Bank 6% euros if this firm requires euro and did not had it before? So as EU firm is paying to the SB interest in $, but from where? And how did these firms exactly get required currencies in required amount?
Никита Виноградов They exchange the principal at the beginning of the swap
But this money are invested abroad so at this point they still need to face exchange rate usd/eur
the percentage table make confusion. which percentage is for borrow and which is deposit and which is euros and dollar.
thank you for your video ... very well explained
Thank you so much,sir.
Nice video! Question! In the example you provide there is no spread? so therefore the SWAP bank doesent make any money? correct? There will be a spread in reality right?
Thnx man it is clear to me now.
If company A borrows with a 7% rate in Euros it would be cheaper than 8% in $ you should change 7% to somethin greater than 8% maybe 10%
great video! well explained
but what if these two companies need a slightly different amount of money borrowed? why would company A be interested in borrowing $52mln when it only needs $51,7mln for example? I don't think these SWAP banks are always able to find an exact match when two companies need the same amount of money
Excellent explanation sir
Excellent presentation
Thank you Ronald
For currency swap, I see three records, one at swap level and another at leg level. When we do aggregation, how to record that.
you enlighten me! thank you!
Thank you so SO SO much!
6:27 What would happen if one company had an advantage in both markets at the same time?
As long as one has a comparative (bigger advantage) in one market then there is a benefit to the swap.
Are there any possible scenarios where the swap might go wrong due to changing interest rates for any of the currencies or if the currency rate itself changes?
Thank you so much!! Really!
Sir my question is if swap Bank charge 1% charge for both firm transaction or if some other x% charge on tax then advantage of currency swap get cancelled ?
They eventually have to exchange the 52 millions to euros so why bother the swap?
Nice
You made two mistakes in the arrow direction of the graph with no numbers.
Thank you so much!
Can I get the PPTs.
sir, how about the main principal amount?
the main principal amount is set at the time of the contract. In a currency swap, the principal to be paid at maturity in one currency is equal to the principal expressed in the other currency * the exchange rates at the time of maturity.
Supper explanation.
Thanks
Thanks
Thank you
what happens in the case when the company also has to make payment to the swap bank ??
If the bank takes say 1/4%, then for example, Firm B might pass 8.25% to the bank and the bank passes 8% to Firm A, which will leave the bank with 1/4%, and B paying 1/4% more. Likewise, A could send the bank 6.25% and the bank only passes 6% to B. Here the bank gets some of the gains from the swap and both A and B pay a little more. However, both A and B are still better off than without the swap.
@@RonaldMoy by 0.75% better off.
Thank you!
nice
am I the only one laughing at the fact that company A could be borrowing in Europe directly at 7%? Lol. I think he means the opposite
sir, for the bank where is his profit ?????!!!!!!
There isn't any in this example. Probably should have included that in the example.
Any swap free broker any chance????