Problem:
At the next finance department staff meeting, the CFO asked you to lead a discussion on the use of one specific tool to reduce exchange rate risk-a currency swap (The others are forward contracts and futures contracts.). He asked you to cover the following questions:
- What would be a typical example where your company engaged in international business and, interested in selling long-term bonds, might make use of currency swaps?
- The proceeds from the bond sale will be used to expand a factory, in the home country, which is country A.
- Are there any disadvantages to using a currency swap?
- How could you minimize the impact of these disadvantages?
Summary of question:
This question basically belongs to Finance as well as it explains about implementing a specific tool to reduce exchange rate risk - a currency swap. Questions about this like an example, the disadvantages of this idea and minimizing the impact of the disadvantages, etc have been answered in the solution in detail.