ABSTRACT
This chapter provides an explanation of what constitutes an international currency swap and the tools required to engineer and execute swap contracts. The currency swap is a transaction between two borrowers, coordinated by a financial intermediary. Under a swap agreement, one party agrees to make periodic payments in a given currency, for a specific period, to meet a liability incurred by the other party in terms of the said currency. In return, the second party agrees to do the same thing on behalf of the first one, but in a different currency. To explain a currency swap engineered on the basis of absolute advantages in borrowing, the chapter focuses on the case of two multinational corporations, one from the United States and the other from Germany. In the absence of default risk, a currency swap can be decomposed into a position of two long-term debt instruments — bonds.
