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Currency options

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ANOOSHA Polagani , Divya Pareek , Student at Mody university. Embeds 0 No embeds. No notes for slide. Futures versus Forwards 5 6. Therefore, it minimizes the risk of default.

All previous losses have already been settled in cash. Basics of Options Spot rate, A corporate borrower has an existing debt service obligation. Based on their interest rate predictions they want to swap to another exposure e.

Two borrowers can work together to get a lower combined borrowing cost by utilizing their comparative borrowing advantages in two different markets. The swap broker receives a commission for this service.

Currency Futures, Options & Swaps

As a market maker, the swap bank stands willing to accept either side of a currency swap. Example of an Interest Rate SwapThe borrowing opportunities of the two firms are shown inthe following table.

Example of an Interest Rate SwapTo see the potential advantages to a swap, imagine the twoentities trying to minimize their combined borrowing costs: COMPANY B BANK A TOGETHER Borrow preferred Example of an Interest Rate Swap COMPANY B BANK A TOGETHER Borrow preferred If Swap Bank takes 0.

If they share this equally then: Example of an Interest Rate SwapWill the swap bankmake money? Their borrowing opportunities are given below.

Company A pays Example of a Currency SwapThe swap bank makes 1.

Bank million per year for 5 years. Assume that at Year 3, the applicable dollar interest rate is 7. Start clipping No thanks. You just clipped your first slide!

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