Swap 2

Consider a U.S. commercial bank that wishes to make a two-year, fixed-rate loan in Australia denominated in Australian dollars. The U.S. bank will fund the loan by issuing two-year CDs in the U.S. Why would the U.S. bank wish to enter into a currency swap? The bank faces the risk that:

A) the Australian dollar increases in value against the U.S. dollar. B) interest rates in Australia decline. C) the Australian dollar decreases in value against the U.S. dollar.

The bank is trying to hedge any potential losses of principal repayment. Therefore, answer should be C