Emerging Market dollar debt, FX swaps and exchange rate risks "An FX swap, on the other hand, creates no exchange rate risk for its counterparties. This is because currencies are sold and repurchase at fixed spot and forward rates. In other words, when you sell one currency for another through an FX swap, you know from the start how much of your original currency you will get back. An FX swap is a liquidity management tool, not a risk management tool." Source: https://icmacentre.blog/2017/09/22/are-fx-swaps-and-forwards-missing-global-debt-why-the-bis-is-wrong/

However, consider the following: An Emerging Market (EM) corporate issues dollar debt and hedges its exposure by entering an FX swap agreement with an International Entity (i.e. a global bank). The EM corporate exchange the amount of Dollar that it received from bond issuance for domestic EM currency at the beginning of the contract.

In this scenario isn't, the global bank exposing herself to exchange rate risk, ceteris paribus?

1) First, the global bank needs to convert its dollar assets into the EM domestic currency in order to supply the domestic currency to the EM corporate and enter into a FX swap agreement.

2) Second, at the end of the contract the global bank will receive back an amount of EM domestic currency at a predetermined forward rate from the EM corporate. However, the global bank presumably derives "utility" from dollar assets and hence will need to convert the EM currency proceeds that she receives from the FX swap into dollars using the future spot rate.

3) The future spot rate is clearly uncertain at the time when the FX swap is initially signed, hence the global bank is exposing herself to exchange rate risk.
However, the global bank presumably derives "utility" from dollar assets and hence will need to convert the EM currency proceeds that she receives from the FX swap into dollars using the future spot rate.


The bank already had the EM currency though, right? If they had invested it in the EM stock market or any other way they would have had to do switch the returns to dollars anyway, so this is not caused by FX swap.

If the bank did not have the EM currency before entering into the FX swap then it is buying the EM currency when the goal is actually future dollars that creates the exchange rate risk, not FX swap itself.