the interest.
Short- and Long-Dated Contracts
57
CONCLUDING REMARKSThe principle for short- or long-dated contracts is the same as with forward rates and is made onthe basis of interest rate gain or loss. The exception to the rule is that prices normally added onare deducted and prices normally deducted are added. This, actually, is not as odd as it sounds.If prices are normally quoted for spot delivery and a value tomorrow quote means the marketmaker will have to surrender dollars earlier than normal, there has to be some compensation.
10Broken-Dated Contracts
A broken-dated contract is a forward contract with maturity other than the normalmarket quote of complete months.
10.1 CALCULATIONSIn order to price a broken-dated contract, it is necessary to interpolate between the two standarddate quotations on either side of the desired maturity. For example, to work out the forwardpips for the dollar against the Japanese yen for one and half months (45 days), assume thefollowing rates:USD/JPY spot123.30/401-month forward pips 21/182-month forward pips 44/41The pips for buying JPY and selling USD would be calculated according to the following:
r Work out the number of days in the period between the 1-and 2-month forward quotes,because the delivery date falls within this period. The answer is 45 days.
r Subtract the bid 1-month forward pips from the bid 2-month forward pips, which will thenshow what the 2-month pips are worth over the 1-month pips. The answer is 23 forwardpips.r Divide the difference in forward pips (23) by the number of days in the period between thetwo standard quotes (45) and multiply the answer (0.5111) by the difference in the numberof days between the required date and the last day of the 2-month quote (15). Hence, thetotal of those days is worth 7.7 forward pips.r Subtract this answer (7.7) from the 2-month forward pips, giving us the forward pips for thebroken date of 36.3.The interpolated rate is the basis for the market maker’s quote, but the actual rate quoted willalso probably reﬂect the market maker’s position.
10.2 OUTRIGHT FORWARDSAn outright forward contract is the purchase or sale of a currency for delivery onany date other than spot and not forming part of a swap operation.An importer might want to ﬁx the rate today, for the delivery of a shipment in two months’time. The process for the rate on an outright is to use the spot rate and the 2-month forward
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A Foreign Exchange PrimerDay 0
Done date
Day 2 (spot)
Day 1
USD/JPY spotquoted as123.32/37butoutright forwardquoted as122.88/96
Day 60 (forward)
Value date
Settlement
Agreed trade(price, amountand date)
Figure 10.1 An outright forward transaction
pips. If the spot dollar/yen is 123.32/37 and the 2-month forward pips are 44/41, the outrightprice for two months’ time is 122.88/96 (123.32–44 and 123.37–41). As already illustratedfor a spot transaction, an outright forward transaction can be illustrated as in Figure 10.1
10.3 A CONVERSATIONA conversation between the importer and the market maker could be:Importer: What is the 2-month dollar/yen forward pips please?Market maker: 2-month forward dollar/yen is 44 at 41Importer: OK, spot dollar/yen in two dollars please?Market maker: 123.32/37Importer: At 123.32, I sell two million dollars – outright two months please.Market maker: OK, so you sell two million dollars against the yen outright two months at anall-in rate of 122.88. Thanks. (123.32–0.44)Notice how the importer asked for the 2-month forward pips ﬁrst of all and then asked for thespot price. It is possible to ask for the spot price ﬁrst of all, but because the spot price is morevolatile, the market maker is unlikely to keep the spot price the same, while the forward pipsare requested. Also, if the importer deals on the spot price ﬁrst of all, and then requests theforward pips in order to make the deal an outright, the market maker is more likely to ‘mark’the forward pips accordingly.
Glossary of Terms for Chapters 7 to 10Below are some commonly used expressions which market makers employ. Like most esotericenterprises, the foreign exchange market likes to surround itself with jargon and technicalshorthand. Hopefully, this glossary will dispel some of the mythology.At a discount A currency which is less expensive to purchase forward than for spot delivery.Its interest rates are higher than those of the latter.At a premium A currency which is more expensive to purchase forward than for spotdelivery. Its interest rates are lower than those of the latter.Bid, wanted, ﬁrm, strong The currency in question is appreciating, or in demand, and buyersof the currency predominate.Broken date, odd date A value date which is not the regular forward date and implies anodd number of days.Cash
Same as value today, where funds are settled on the same day as the contract is struck.
End/end If the spot value of the near end of a swap falls on the last business day of themonth, the forward date must also be the last business day of the month, for example28 February to 31 March, not 28 March.Firm A market maker making a commitment to a price.For indication Quotations which are not ﬁrm and are intended as an indication of unwillingness or inability to trade.Forward Any transaction, which settles on a date beyond spot. Where the maturity falls ona non-trading day, settlement takes place on the following business day.Forward/forward A swap price where both value dates are beyond spot.Long, overbought
Excess of purchases over sales.
‘Mine’ The trader buys the currency and amount speciﬁed at time of asking for a quote.Offered, weak The currency in question is depreciating and sellers of the currency predominate.
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A Foreign Exchange Primer
Outright The purchase or sale of a currency for delivery for any date, other than spot notbeing a swap transaction.Overnight A swap price for today against tomorrow.Par Where spot is the same as the forward price, indicating that interest rates in the respectivecurrencies are identical.Pip The last decimal place of a quotation.Short dates Usually swap prices for days up to one week.Short, oversold
Excess of sales over purchases.
Spot date Cash settlement two working days from the trade date. The exception to the ruleis the Canadian dollar, which is one working day from the trade date.Spot next or spot a day
A swap price for spot against the following day.
Spot rate The price at which one currency can be bought or sold, expressed in terms of theother currency, for delivery on the spot date.Spread The difference between the buying and selling price of a foreign exchange quotation.Square Purchases and sales are equal, i.e. no position, or no further interest in dealing.Swap (fx) The simultaneous purchase and sale of one currency against another for twodifferent value dates. It is the combination of a spot and a forward, or the combination oftwo forwards.Swap pips, points Used to calculate the forward price and are determined by interest ratedifferentials.Tom next
A swap price for tomorrow against the next day, which is spot.
Value date, settlement date The date agreed upon by both parties on which the two paymentsinvolved are settled.Value tomorrow
Except in Canada, settlement is one day ahead of spot value.
‘Yours’ The trader sells the currency and amount speciﬁed at the time of asking for a quote.‘Your risk’ Where the response is not immediately forthcoming from a market user when amarket maker has quoted a price, the market maker may, at its discretion, indicate the priceis no longer ﬁrm by stating that the market user is now at risk of the price changing againsthim or her.
11Non-Deliverable Forwards
A non-deliverable forward (NDF) is a cash settled forward and is conceptuallysimilar to an outright forward foreign exchange transaction.A (notional) principle amount, forward exchange rate and forward date are all agreed at thedeal’s inception. The difference is that there will be no physical transfer of the principle amountin this transaction. The deal is agreed on the basis that net settlement will be made in Americandollars, or another fully convertible currency, to reﬂect any differential between the agreedforward rate and the actual exchange rate on the agreed forward date. It is a cash-settledoutright forward.
11.1 FIXING METHODOLOGYWhen a NDF deal is contracted, a ﬁxing methodology is agreed. It speciﬁes how a ﬁxing spotrate is determined on the ﬁxing date, which is normally two working days before settlement,to reﬂect the spot value. Generally, the ﬁxing spot rate is based on a reference page on eitherReuters or Telerate with a back up of calling between three and ﬁve market banks. Settlementis made in the major currency, paid to or by the client, and reﬂects the differential between theagreed upon non-deliverable forward rate and the ﬁxing spot rate.The NDF is quoted using foreign exchange forward market convention, with two wayprices quoted as bid/offer pips, at a premium or discount to the prevailing spot market. Thespreads are probably wider than would be expected in the normal forward market. As witha normal forward transaction, the market user either buys or sells the NDF, depending onthe position to be hedged or according to the view of the underlying currency or interestrates.
11.2 RISK MANAGEMENT TOOLNDFs are a risk management tool used to hedge the risk of forward currency inconvertibility,which can result from a number of factors, including credit risk, sovereign risk, regulatoryrestrictions, or lack of settlement procedures. NDFs are typically utilized by banks, multinational corporates, investment managers and proprietary traders to hedge currency risk. Inaddition, NDFs can be used for currency arbitrage, to trade currencies where formal transaction documentation does not exist (as an off-balance-sheet product, documentation is notrequired) or as a tool to facilitate locking in the enhance yields of emerging market currencies. Volatile currencies can bring greater yields when compared to current short-terminterest rates in America and Europe. (The characteristics of emerging markets are given inTable 11.1.)
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A Foreign Exchange PrimerTable 11.1 Characteristics ofemerging markets1. Limited currency convertibility2. Central bank regulations3. Illiquid markets4. Limited hedging vehicles5. Event/sovereign risk6. Greater volatility7. Cross-border risk8. Withholding taxes
11.3 AVAILABILITYNDFs are available in several ‘exotic’ currencies, and for most NDF products prices are quotedfor up to one year. It is not unusual to have the spot price being fully convertible, but forwardspast spot being quoted only on a NDF basis. Today, most South American countries and someFar East countries operate NDFs.
11.4 EXAMPLESTo hedge against a currency depreciation when the ﬁxing rate is greater than the outright priceat maturity, the purchaser of the NDF would receive from the seller the difference betweenthe ﬁxing rate and the outright rate in cash terms. This amount can be calculated by using thefollowing formula:(F − O) × NF
where
F = ﬁxing rateO = outright priceN = notional amount
Obviously, if the ﬁxing rate is less than the outright price at maturity, the opposite will apply.To hedge against a currency appreciation where the ﬁxing rate is greater than the outrightprice at maturity, the seller of the NDF pays the buyer the difference between the ﬁxing rateand the outright rate in cash terms, calculated as above. As with a purchase, if the ﬁxing rateis less than the outright price, the opposite will apply. An example of the above would be:Notional amount:Maturity:Spot:90-day NDF:Outright:Fixing rate:
$10 000 00090 days2.0000 fx/$0.01002.0100 fx/$2.0200 fx/$
Non-Deliverable Forwards
65
At maturity, the purchaser of the NDF will receive from the seller:(2.0200 − 2.0100) × 10 000 0000.0100 × 10 000 000=2.02002.0200= $49 504.95Another example is where, say, an investor has invested $2 000 000 in stock on the Koreanstock market for one year. The investor expects the stock market to rise, but is worried aboutpotential Korean won (Krw) depreciation. The investor wishes to hedge the foreign exchangeexposure using an NDF. A non-deliverable forward rate of Krw 1310 per dollar is agreedbetween the bank and the client. The principle amount is $2 000 000. There are three possibleoutcomes in one year’s time:
r The Krw has reached the forward rater Depreciated furtherr Appreciated relative to the forward rate.The following shows examples of the three scenarios:Outcome A
Outcome B
Outcome C
Depreciated
–
Appreciated
Fixing spot rate
1330
1310
1290
Equivalent amount
$1 969 925
$2 000 000
$2 031 008
Settlement
Bank paysclient $30 075
No net payment
Client paysbank $31 008
USD/KRW
In all outcomes, the client has achieved the objective of hedging the KRW exposure at 1310.
r In outcome A, the exchange rate loss that the client would suffer if the investor sells theinvestment and exchange the Krw proceeds in the spot market, is compensated by theproceeds of the NDF.r In outcome C, the client’s exchange gain on realization of the investment is countered bythe payment the investor makes on the NDF.For a corporate, an example would be where the corporate is due to receive Philippine pesos(Php) 102 000 000 in three months’ time. They are concerned about potential depreciation andwish to hedge this exposure using an NDF. Assume the agreed non-deliverable forward rateis Php 51 per dollar. The principle amount of Php 102 000 000 is equivalent to $2 000 000.Again, there are three possible outcomes in three months’ time:Outcome A
Outcome B
Outcome C
Depreciated
–
Appreciated
Fixing spot rate
51.5
51.0
50.5
Equivalent amount
$1 980 583
$2 000 000
$2 019 802
Settlement
Bank paysclient $19 417
No net payment
Client paysbank $19 802
PHP/USD
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A Foreign Exchange Primer
Figure 11.1 USD/TWD downward pressure widening NDF discount. Reproduced by permission of4CAST LimitedSource: 4castweb.com
The consequences are as in the above example.Please note: All rates and other ﬁgures are for illustrative purposes only.
11.5 TYPICAL RISKS ENCOUNTERED
r Contingent risk – This exists when the dollar value of anticipated but not yet committedcash ﬂows is subject to changes in exchange rates (see Figures 11.1 and 11.2).
Figure 11.2 USD/JPY dragging spot USD/TWD and NDFs lower. Reproduced by permission of4CAST LimitedSource: 4castweb.com
Non-Deliverable Forwards
67
r Sovereign risk – This is the risk that the government of a country may interfere with therepayment of a debt. For example, a borrower in a foreign country may be economicallysound and capable of replaying a loan in local currency. However, his country’s governmentmay not permit him to repay a loan to a foreign bank because of a lack of foreign exchangeor for political reasons. The bank making the loan in the ﬁrst place must take this sovereignrisk into account and reﬂect it in the interest rate.r Transaction exposure – This arises whenever any company unit commits to pay or receivefunds in a currency other than its national currency.r Translation exposure – This is the risk that ﬁnancial statements of overseas subsidiariesof a company will gain or lose value because of exchange rate movements when translatedinto the currency of the parent company upon consolidation.
11.6 THE CURRENCIES OF EMERGING MARKETSThe following are examples of some of the better-known currencies, which are non-deliverabletoday.China
The People’s Bank of China controls the level of the reminbi. Offshore access,even to spot payments, is severely restricted.
Korea
Market forces largely determine the value of the Korean won. Despiterecent liberalisation, offshore access to spot and forward markets is stilllimited.
Philippines The Philippine peso is free ﬂoating but non-convertible on the capital account.NDFs have poor liquidity and can move out of line with onshore,particularly when there is pressure on the currency.Taiwan
The Taiwan dollar operates on a managed ﬂoat, and the Central Bankintervenes in order to limit excessive volatility.
Indonesia
The Indonesian rupiah operates on a managed ﬂoat, and the Central Bankintervenes in order to limit excessive volatility.
Argentina
The Argentina peso is pegged 1 to 1 to the dollar according to theConvertibility Law established in 1991. This law states that theCentral Bank must hold international reserves, dollar or gold equal tothe total monetary base. The NDF market is most liquid out to sixmonths.
Brazil
The Brazilian real ﬂoats freely against the dollar after the January 1999devaluation. However, it remains restricted to offshorecounterparties.
Chile
The Chilean peso is free ﬂoating although restricted in the offshore market.
Colombia
The Colombian peso is free ﬂoating and the NDF market is among thesmaller of the Latam region.
Peru
The New Peruvian sol ﬂoats freely but the NDF market is very thin withlimited liquidity and participants.
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A Foreign Exchange Primer
11.7 INDEX-LINKED DEPOSITSAn index-linked deposit is basically a restructured NDF. It is a deposit held in a major currencywith its return linked to the exchange rate of an NDF and earning an enhanced coupon. Thecoupon reﬂects the implied local interest rates derived from the NDF market, which maybe signiﬁcantly higher than the major currency interest rates. The index-linked deposit isparticularly suitable for asset managers who need to hold a physical asset, but at the same timewish to gain access and exposure to higher yielding markets.Index-linked deposits are available in two types, namely those linked to principal and interest and those purely linked to principal. The former offers a higher coupon but exposesboth principal and interest to exchange rate ﬂuctuations; whereas the latter exposes only theprincipal. Both types of deposit are not principal protected. These deposits not only have manyof the same advantages as NDFs, but they also often allow depositors to assume a lower creditrisk or to earn more interest than depositing onshore. Moreover, they can be used as a form ofcollateral for NDFs.
CONCLUDING REMARKSAn NDF is a short-term committed forward ‘cash settlement’ currency derivative instrument.It is essentially an outright (forward) foreign exchange contract whereby, on the contractedsettlement date, proﬁt or loss is adjusted between the two counterparties based on the differencebetween the contracted NDF rate and the prevailing spot foreign exchange rates on an agreednotional amount.The NDF rate is the rate agreed between the two counterparties on the transaction date.This is essentially the outright (or forward) rate of the currencies dealt. The notional amountis the ‘face value’ of the NDF, which is agreed between the two counterparties. It should againbe noted that there is never any intention to exchange both currencies’ principal sums – theonly movement is the difference between the NDF rate and the prevailing spot market rate,and this amount is settled on the settlement date.Every NDF has a ﬁxing date and a settlement (delivery) date. The ﬁxing date is the day andtime whereby the comparison between the NDF rate and the prevailing spot rate is made. Thesettlement date is the day whereby the difference is paid or received.As it is a ‘cash settlement’ instrument, there is no movement of the principal amounts ofthe two currencies contracted. The only movement is the settlement amount representing thedifference between the contracted NDF rates and prevailing spot rate. Hence, NDFs are ‘noncash’ products, which are off the balance sheet and as the principal sums do not move, possessvery much lower counterparty risks.NDFs are committed short-term instruments. Both the counterparties are committed and areobliged to honour the deal. Of course, the user can cancel an existing contract by entering intoanother offsetting deal at the prevailing market rate.The more active banks will quote NDFs between one month and one year, although somewill quote up to two years on request. Odd-dated NDFs can also be requested.It should also be noted, that NDFs are quoted with the dollar as the reference currency –that is, they are quoted in terms of dollar against other third currencies and the settlement isalso in dollars.Without an NDF, an investor who wanted to take advantage of the type of enhanced yieldsavailable in the emerging markets would have to do the following:
Non-Deliverable Forwards
r Buy the spot currency and sell dollars.r Invest in a local risk-free asset (i.e. government bond).r Fund the dollars at Libor. (At maturity, the investor receives the capital plus interest.)r Sell the currency on the spot market and purchase dollars.
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12Foreign Exchange SwapsA foreign exchange swap is the simultaneous purchase and sale of one currency against anotherfor two different value dates. One of the value dates is usually the spot date and the other isa date in the future. In a typical swap transaction, one currency amount is held constant forboth dates of the transaction. Most foreign exchange swaps have a maturity of less than oneyear.A forward/forward is a swap where both the near date and the end date are forwarddates.In fact, a swap may be most easily understood as simply the combination of a spot and aforward, or the combination of two forwards. It can be the combination of a purchase witha simultaneous forward sale or a sale with a simultaneous forward purchase. Like forwardcontracts, swaps are regularly for periods of one, two, three, six and 12 months from the spotvalue date. Frequently, however, the date is customized to meet a client’s needs.Forward contract prices are determined, as before, by the current spot price between thetwo currencies and the interest rates prevailing in each of the two countries. For example, acompany could sell dollars and buy Swiss francs spot, and buy dollars and sell Swiss francsthree months forward. The cash ﬂows in such an exercise is similar to borrowing one currency(Swiss francs) and investing in another (dollars). The exposure to the company is one of interestrate risk rather than currency risk. Consequently, a bank will only charge, or pay, the interestdifferential.
12.1 THE VALUE OF FOREIGN EXCHANGE SWAPSSwaps are used primarily by investors and borrowers, and for cash management purposes.They are valuable to those who have liquidity in one currency but need liquidity in anothercurrency. Typically, a client will buy spot and sell forward to generate liquidity in the currencypurchased at spot. That is, if a client exchanges dollars for francs at spot and simultaneouslyexchanges francs forward for dollars, the client has created liquidity in francs (i.e. has them tospend) until the forward date. A foreign exchange swap is an alternative to straight borrowingin a foreign currency.A swap allows the two parties involved to use a currency for a period in exchange foranother currency not needed at that time. For example, companies can access foreign currencyto ﬁnance foreign currency denominated assets, such as those of a foreign subsidiary. Hence,foreign exchange swaps can help clients to diversify their investments, to fund intracompanyloans, to fund a position rather than use the money markets, to potentially improve the yieldwith no exchange risk in conjunction with a foreign currency investment, and to minimize
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A Foreign Exchange Primer
borrowing costs in certain cases by using a swap rather than straight borrowing in a foreigncurrency.In such a contract, the exposure is therefore one of interest rate risk rather than currency risk.Consequently, market makers will only charge, or pay, the interest differential. In the swapmarket, this interest differential is expressed, again, in points or pips.
12.2 CALCULATIONSThe formula for determining the interest rate differential underlying the swap pips is:S36 000+C= 360/360 arbitrageC−TBwhere C = currency interest rateT = period in number of daysS = swap pips as a decimal added or deductedB = outright forward rate.Swap pips are unequal, which can be seen in Figure 12.1.As can be seen, the client has to borrow dollars at the higher rate, but can only invest yen at thelower rate. Similarly, the client has to borrow yen at a rate lower than the deposit rate in dollars.
Borrow $ @ 10%
3-month Americaninterest rates10% – 9.875%
Invest $ @ 9.875%
3-month Japaneseinterest rates5.375% – 5.25%
Interestrates
Borrow Jpy @ 5.375%
Invest Jpy @ 5.25%
Time
Figure 12.1 Example of unequal swap pips
Foreign Exchange Swaps
73
Consider the following quotation:Spot USD/SFR3-month forward points3-month dollar deposit3-month Swiss franc deposit
1.4791 1.479625.524.51.72% 1.82%1.09% 1.17%
In order to choose the number of points to be applied in the swap, analyse the cash at maturity.In the above example, the company is buying dollars and selling Swiss francs, which is theright-hand side of a foreign exchange quote, so the number of points is 24.5. The number ofpoints represents the interest differential when borrowing Swiss francs and investing dollars.Similarly, 25.5 points represents the interest differential when borrowing dollars and investingSwiss francs.12.2.1 Points of noteThere are two points to note about foreign exchange swaps.
r Firstly, as the swap pips determine the price of the swap, the spot rate used is less important.In practice, market makers tend to use the middle rate when actually processing the swaptransaction. The key point to note is that whichever spot rate is chosen, the forward rate isdetermined by adjusting that spot rate by the swap pips.r Secondly, the amount of one currency in a swap is kept constant. Typically, this is the dollar,thus the same amount of dollars is sold and bought in the transaction.
12.3 USES OF FOREIGN EXCHANGE SWAPSAs mentioned above, swaps are undertaken together with a money market operation to takeadvantage of imperfect exchange rate and interest rate differentials. This is particularly ofuse to companies, which have a borrowing advantage in one currency or type of facility overanother, i.e. acceptance facility.Swaps are also used where the domestic money market may not offer the necessary investment possibilities. For example, the smaller Swiss companies and wealthy private clients placeshort-term Swiss franc deposits with the Swiss banks domestically. Since there is a shortageof domestic money market instruments in which to invest these deposits, the Swiss banks mayplace them abroad, mainly in dollars, through swaps.Finally, a swap can be used to hedge exposure. For example, a client wishes to buy Japaneseyen against dollars three months forward. The bank can cover the obligation to provide theJapanese yen by purchasing them spot and undertaking a 3-month dollar against Japaneseyen swap, giving up the use of Japanese yen, but getting the use of dollars for the period.At maturity, the bank uses the Japanese yen received under the swap to meet the obligationto the client, and the dollars received from the client to meet the dollar obligation under theswap.Alternatively, a client can use a swap to roll a hedge forward. For example, the client mayhave entered into a contract to buy Swiss francs against dollars forward. If, in three months’time, the dollars do not materialize, the hedge would be extended. This can be achieved usinga swap, whereby the original forward is closed out by the spot transaction and the exposure iscovered by the forward transaction.
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A Foreign Exchange Primer
CONCLUDING REMARKSSwap risks are almost identical to those for forwards. A swap effectively becomes a forwardonce the near date has settled. The difference between a forward and a swap is that to do aswap there must be two transactions in opposite directions at different times.
13Currency SwapsA currency swap is an agreement between two counterparties to exchange future cash ﬂows.There are two fundamental types: the cross-currency swap and the interest rate (singlecurrency) swap.A cross-currency swap involves the exchange of cash ﬂows in one currency for thosein another with an agreement to reverse that transaction at a future date.An interest rate swap changes the basis on which income streams or liabilities arereceived or paid on a speciﬁed principal amount.From a foreign exchange point of view, cross-currency swaps are much more relevant asthey allow companies to borrow in the most efﬁcient market, usually one in which the companyhave not borrowed too heavily in the past. The major difference between cross-currency swapsand currency forwards is that there is only one contract in the case of swaps, whereas forwardsrequire separate contracts for each payment of interest and principal.Figure 13.1 presents, in graphic form, the three stages of a currency swap.
13.1 TECHNIQUE INVOLVEDCurrency forwards involve amounts of two currencies being exchanged for an agreedperiod of time and re-exchanged at maturity at the same exchange rate.An interest rate swap is exclusively concerned with the exchange of cash ﬂows relating tothe interest payments on the designated notional amount. However, there is no exchange ofnotional amount at the inception of the contract. The notional amount is the same for both sidesof the currency and it is delineated in the same currency, i.e. principle exchange is redundant.In the case of a currency swap, however, principle exchange is not redundant. The exchangeof principle on the notional amounts is done at market rates, often using the same rate for thetransfer at inception as is employed at maturity.For example, consider an American-based company that has raised money by issuing a Swissfranc-denominated Eurobond with ﬁxed semi-annual coupon payments of 6% on 100 millionSwiss francs. Up front, the company receives 100 million Swiss francs from the proceeds of theEurobond issue. In essence, they are using the Swiss francs to fund their American operations.Because this issue is funding American-based operations, the company is going to have toconvert the 100 million Swiss francs into dollars. This can be done by entering into a currencyswap whereby the Swiss franc debt can be converted into a dollar like debt.The American company can agree to exchange the 100 million Swiss francs at inception intodollars, receive the Swiss franc coupon payments on the same dates as the coupon payments
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