Looking to confirm my understanding on the use case of currency swaps, since CFAI seems to have come up with so many creative ways a swap can be used that I seem to have gotten lost in why one would use it.
The primary use case of a currency swap is to provide foreign lenders with more favorable rates than if they were to issue a bond in a foreign country directly. Ex: US firm can access Korean Won to fund its expansion in Korea at a rate that a Korean bank would lend to a Korean firm (which is lower than the rate it would lend to a US firm that it is not familiar with). The benefit of the swap here is it allows the US firm to not only get a lower funding rate, but also lock in the exchange rate that’s used to determine the notional principals and subsequent cash receipts (this is how it is used to hedge forex risk).
Now, the secondary use of a swap seems to be to convert funds from one currency to another. This would be done only if the domestic and foreign interest rates are SIMILAR (or even better if they are at par, in which case one would be indifferent between using a forward and a swap). If the interest rates between the two countries are vastly different, then it is better to use a forward so you don’t end up in a situation like this https://bit.ly/2JfL28R)
Is my understanding above correct?