The primary reasons for a counterparty to use a currency swap are:
A) to hedge and to speculate.
B) to play in the futures and forward markets.
C) to obtain debt financing in the swapped currency at an interest cost reduction brought about through comparative advantages each counterparty has in its national capital market, and the benefit of hedging long-run exchange rate exposure.
D) to gamble in the futures and forward markets.

Question

Quizplus · Accepted Answer

Currency swaps are primarily used for obtaining debt financing in a swapped currency with an interest rate reduction. This happens as each counterparty has a comparative advantage in their national capital market, and hedging against long-run exchange rate exposure is an additional benefit. Currency swaps are not typically used for speculation or gambling in futures and forward markets.

The Primary Reasons for a Counterparty to Use a Currency