At the next finance department staff meeting, the CFO asked you to lead a discussion on the use of one specific tool to reduce exchange rate risk—a currency swap (The others are forward contracts and futures contracts.). He asked you to cover the following questions:
· What would be a typical example where your company engaged in international business and, interested in selling long-term bonds, might make use of currency swaps?
· The proceeds from the bond sale will be used to expand a factory, in the home country, which is country A.
· Are there any disadvantages to using a currency swap?
· How could you minimize the impact of these disadvantages?
The question belongs to Finance and it discusses about implementing a specific tool to reduce exchange rate risk – a currency swap. Questions about this like an example, the disadvantages of this idea and minimizing the impact of the disadvantages, etc have been answered in the solution in detail.
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