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Currency Swaps As a Long-Term International Financing Technique

Abstract

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.

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*Y. S. Park is Professor of Business Administration at the School of Government and Business Administration, The George Washington University. His teaching and research Interests focus on international banking, international financial management, and financial markets. Among his many publications is a new book, International Banking in Theory and Practice (Addison-Wesley 1984).

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Park, Y. Currency Swaps As a Long-Term International Financing Technique. J Int Bus Stud 15, 47–54 (1984). https://doi.org/10.1057/palgrave.jibs.8490494

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