Converting foreign cash receipts

CFA Level III Derivatives
#1

I’m working through Schweser and hoping if someone can help me understand the point of using a currency swap to convert a series of foreign cash receipts into domestic cash receipts (as per the Learning Outcome Statement).

Aside from the fact that you are guaranteed a fixed payment in domestic currency, why would you use this when you could simply lock in forward rates for the future dates? Is it just an alternative and, if so, what is the motivation for entering into this trade, given you will know, up front, what the receipts will be over time for both? Lower transaction costs perhaps?

Thanks

#2

you convert your foreign currency higher interest rate (due to bad credit abroad, you are not known abroad), by using the swap and converting it into better terms overall - so you end up paying a lower foreign interest.

#3

You’re correct: a swap is equivalent to a series of forward contracts. Using a swap instead of multiple forward contracts probably has slightly lower transaction costs, and less paperwork.

#4

Thanks for clearing that up Magician - much appreciated.

#5

My pleasure.