Specific tool to reduce exchange rate risk


Task: 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:

Q1. 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.

Q2. Are there any disadvantages to using a currency swap? How could you minimize the impact of these disadvantages?

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Finance Basics: Specific tool to reduce exchange rate risk
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