Suppose a U.S.corporation wants to secure fixed-rate funds in pounds in order to reduce its pound exposure,but is hampered in doing so because it is a relatively unknown credit in the British financial market.In contrast,a British company that is well established in its own country may desire floating-rate dollar financing,but is relatively unknown in the U.S.financial market.What is the most appropriate form of swap for these two parties?
A)interest rate/currency swap
B)currency swap
C)interest rate swap
D)debt/equity swap

Question

Quizplus · Accepted Answer

An interest rate/currency swap would be the most appropriate form of swap for these two parties. This type of swap would allow the U.S. corporation to secure fixed-rate funds in pounds by exchanging fixed-rate payments in dollars for floating-rate payments in pounds with a counterparty that is well established in the British financial market. At the same time, the British company would exchange floating-rate payments in dollars for fixed-rate payments in pounds with the U.S. corporation. This would allow both parties to achieve their desired financing options while also mitigating their exposure to foreign exchange risk.