Currency Swaps As a Long-Term International Financing Technique

This paper provides a theoretical framework to evaluate the currency swap transactions initiated by the World Bank in 1981 to obtain long-term funds in low-interest German marks and Swiss francs in exchange for high-interest dollar loans. Unique in its concept as a combination of a traditional currency swap and a debt swap, this new technique is found to provide different sets of financial incentives to the swap participants. On one side, a participant can minimize his “effective” long-term borrowing cost while avoiding the risk of potential market saturation. On the other side, his counterpart can lock up the accumulated book value gain resulting from the favorable exchange rate and interest rate changes since his earlier foreign currency borrowing and at the same time can accomplish long-term exposure coverage not commonly available in the foreign exchange market.© 1984 JIBS. Journal of International Business Studies (1984) 15, 47–54