Multinational Financial Management

Swaps and Interest Rate Derivatives

Man is not the creature of circumstances, circumstances are the creatures of men.

BENJAMIN DISRAELI (1826)

LEARNING OBJECTIVES

• To describe interest rate and currency swaps and explain how they can be used to reduce financing costs and risk
• To calculate the appropriate payments and receipts associated with a given interest rate or currency swap
• To identify the factors that underlie the economic benefits of swaps
• To describe the use of forward forwards, forward rate agreements, and Eurodollar futures to lock in interest rates on future loans and deposits and hedge interest rate risk
• To explain the nature and pricing of structured notes
• To describe credit default swaps and their pricing

This chapter examines several currency, interest rate, and credit derivatives that multinational corporations can use to fund their foreign investments and manage their interest rate risk. These derivatives include interest rate, currency, and interest rate/currency swaps, interest rate forward and futures contracts, structured notes, and credit default swaps. Each of these presents opportunities to the multinational firm to reduce financing costs and/or risk.

9.1 INTEREST RATE AND CURRENCY SWAPS

Corporate financial managers can use swaps to arrange complex, innovative financings that reduce borrowing costs and increase control over interest rate risk and foreign ...