F3 – Financial Strategy CH9 – Currency Risk Management
Chapter 9
Currency risk management
Chapter learning objectives:
Lead Component Indicative syllabus content
C.2 Evaluate financial (a) Evaluate how • Theory and forecasting of exchange rates
risks. financial risks are (e.g. interest rate parity, purchasing power
quantified parity and the Fisher Effect)
• Value at risk
C.3 Recommend ways (a) Recommend ways • Responses to economic transaction and
of managing financial to manage economic translation risks
risks. and political risks
(b) Discuss currency • Operations and features of swaps, forward
risk instruments contracts, money market hedges, futures
(c) Discuss interest and options
rate risk instruments • Techniques for combining options in order
to achieve specific risk profile such as caps,
collars and floors
• Internal hedging techniques
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1. Exchange rates
• Expressed in terms of the quantity of one currency that can be exchanged for one unit
of the other currency.
• Can be thought of as the price of that currency, e.g.:
1 USD = 0.6667 GBP
Note:
• To convert from USD to GBP, multiply by 0.6667
• To convert from GBP to USD, divide by 0.6667
• This can also be stated as $1 = £0.6667 or $1:£0.6667
• Exchange rates are usually quoted to four decimal places.
Inverting exchange rates
USD can be expressed in terms of GBP instead of vice versa:
1 USD = 0.6667 GBP may be expressed in terms of USD to GBP by dividing 1 by the rate:
1 ÷ 0.6667 = 1.5000
Therefore, the alternative expression of the rate is:
1 GBP = 1.5000 USD
Spot Rate:
• The rate given for a transaction with immediate delivery (now).
• In practice, it is settled within two business days.
Spread:
• Banks want to make a profit out of a deal.
• They do so by selling low and buying high.
• This means that they earn a margin (spread) on the deal as well as commission and
fees.
• The rate at which the bank will sell the variable currency, USD, in exchange for the
base currency, GBP, is 1.4500 USD, i.e. the rate at which it will buy GBP.
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• The rate at which the bank will buy USD in exchange for GBP is $1.5500 USD, i.e. the
rate at which it will sell GBP.
Direct and indirect currency quotes
The direct quote is the amount of domestic currency that is equal to one foreign currency
unit.
The indirect quote is the amount of foreign currency that is equal to one domestic currency
unit.
Cross Rates
This is where we are not provided with the exchange rate for a particular currency but are
instead given its relationship with a different currency.
For example, if we have a rate in GBP1/USD and a rate is given in GBP1/EUR, we may
derive a cross rate for EUR1/USD by dividing the GBP1/USD rate by the GBP1/EUR rate.
2. Exchange rate theory
Forecasting exchange rates
Note:
• In the short term, rates may fluctuate due to market sentiment and speculation, which
are not easily explained theoretically. Over the longer term, more fundamental factors
come into play.
• Forecasting exchange rates with some degree of accuracy may reduce the transaction
risk faced by the company and may allow hedging costs to be minimised.
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Why exchange rates fluctuate:
• Speculation
• Balance of payments
• Government policies
• Capital movements between economies
Purchasing Power Parity Theory (PPPT)
• The rate of exchange will be directly determined on the basis of the relative rates of
inflation suffered by each currency.
• The country with the higher inflation will suffer a fall (depreciation) in their currency.
The basis of PPPT is the “law of one price”:
• Identical goods must cost the same regardless of the currency in which they are sold.
If this is not the case, arbitrage will take place until a single price is charged.
• Rule: the country with higher inflation will suffer a fall (depreciation) in their currency.
The PPPT formula is:
Test Your Understanding 1: PPPT
The USD and GBP are currently trading at GBP1/USD1.41
Inflation in the USA is expected to grow at 3,2% pa, but 4.2% pa in the UK. What is the future spot
rate in one year’s time?
Please provide your answer up to 4 decimal places.
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Limitations of PPPT:
• Suppliers and manufacturers charge what the market bears, which differs from one
country to another.
• The cost of physically moving some products from one place to another means that
there will always be a premium in some markets compared to others.
• Manufacturers may be able to successfully differentiate products into each market to
limit the amount of arbitrage that occurs.
Is PPPT a good predictor of a future spot rate?
• Future inflation rates are only estimates and cannot be relied upon to be accurate.
• The market is dominated by speculation and currency investment rather than trade in
physical goods.
• Government intervention in both direct and indirect ways can nullify the impact of
inflation.
Interest rate parity theory (IRPT)
• This is based on similar principles to PPPT.
• The IRPT claims that the difference between the spot and forward exchange rate equals
the differential between interest rates available in the two currencies.
Forward rate – an exchange rate agreed now for buying or selling an amount of currency
on an agreed future date.
• If a forward rate is anticipated to be cheap, the forward rate will be quoted at a discount.
• If a forward rate is anticipated to be expensive, the forward rate will be quoted at a
premium.
Spot rates are given in terms of 1 unit of home currency/foreign currency, e.g. GBP1/USD
Test Your Understanding 2: IRPT
Imagine that you are able to borrow the money in Swiss Franks: CHF at a rate of 2.2% pa, while in
Polish Zloty: PLN you can do the same for 6.5% pa. The currency rate of exchange is PLN1/0.2764
CHF.
What is the likely rate of exchange in a year’s time? Please provide your answer up to 4 decimal
places.
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Is IRPT applicable for determine forward rates?
• Controls on the capital market.
• Control on currency trading.
• Government intervention in the market.
International Fisher effect
The nominal interest rate consists of 2 elements: the return by the lender and a premium to
cover expected inflation. If the real rate of return to lenders is the same in all countries
because of free movement of capital and the operation of the law of one price, then any
difference in nominal rate will reflect differences in inflation rates between countries. This is
known as the International Fisher Effect.
Arbitrage
• Arbitrage is the simultaneous purchase and sale of a security in different markets with
the aim of making a risk-free profit through the exploitation of any price difference
between the two markets.
• Used by speculators as a hedging tool.
• Arbitrage differences are short term.
• When other traders see the differences in the price of the commodity, they will exploit
them, and the prices will converge. The difference will disappear as equilibrium is
reached.
3. Financial risk management
The stages of the financial risk management process are essentially the same as in any risk
management process:
1. Identify the risk exposure
2. Quantify exposure
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3. Decide whether or not to hedge
4. Implement and monitor the hedging program
To hedge or not to hedge?
Benefits of hedging: Arguments against hedging:
Hedging by the business may harm
Provides certainty of cash flows
shareholders’ interests
Significant transaction costs associated with
Assists in the budgeting process
hedging
Lack of expertise in using the derivative
Reduced risk
instruments
Management will be more inclined to undertake Complex accounting and tax issues with the
investment projects use of derivatives
Hedging is an attractive policy to risk-averse
managers
Derivative
• A financial instrument whose value depends upon the price of some other financial
asset or an underlying factor.
• The directors of an organisation decide how to use derivatives to meet their goals and
align with their risk appetite.
Uses of derivatives:
• Hedging – used as a risk management tool to reduce or eliminate financial risk.
• Speculation – used to make a profit through predicting market movements.
• Arbitrage – used to exploit price differences between markets.
• Short term only.
• If the commodity appears to be cheap, demand will increase, which will push up
the price.
• The price tends to be differential, where a gain that could be made in the past
has now closed.
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Treasury Function
• This exists in every business but is most visible in large organisations.
• In small businesses, it may be absorbed into the company’s accounting or secretarial
function.
Main treasury functions:
• Managing relationships with banks – to arrange hedging etc.
• Working capital and liquidity management – to ensure that a sufficient amount of
cash is available on a daily basis.
• Long-term funding arrangements – providing cash for longer-term investments.
• Currency management – dealing with currencies, which will entail both internal and
external hedging techniques.
Profit centre or cost centre:
Should treasury activities be accounted for simply as a cost centre or as a profit centre in its
own right?
Advantages of operating as a profit centre,
Disadvantages:
as opposed to a cost centre:
The market rate is charged to business units
The profit motive leads to a temptation to
throughout the entity, making operating costs
speculate and take excessive risks
realistic
The treasurer is motivated to provide services as Management time is wasted on discussions
efficiently and economically as possible about internal charges for the treasury activities
Additional administrative costs will be incurred
Centralised or Decentralised:
Many large entities have a centralised treasury function. This has its own merits and
limitations:
Risks associated with centralised treasury: Risks associated with decentralised treasury:
One company may pay large overdraft interest
A lack of motivation towards managing cash in
costs, while another has cash balances in hand,
the subsidiaries.
earning low interest rates.
The risk of not generating the profits for the
The risk of committing errors at the treasury at group that would be earned if the group funds
head office that may jeopardise the whole were actively managed by treasury operations
financial health of the group. seeking profit rather than individual executives
just seeking to minimise costs.
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4. Currency risk management
5. Internal hedging techniques
Internal hedging - hedging without the use of money markets.
Invoicing in home currency
• Invoicing in the home currency and accepting invoices from suppliers in the home
currency partly remove the currency risk.
• The currency risk is transferred to suppliers and customers.
• This technique does not remove economic risk.
• The value of the business will still fall if overseas competitors are performing better than
their overseas trade in foreign currencies.
Limitations of invoicing in home currency:
• Customers and suppliers may not be prepared to accept all the currency risk, and
therefore they will not trade with the business.
• The other parties may not be prepared to accept the same prices and will require
discounts on sales or premiums on purchases.
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• There are other ways of hedging risks to make the risk of transacting in foreign currency
acceptable.
Leading and lagging:
• A method of trying to make gains on foreign currency payments.
• Leading is making a payment before it is due.
• Lagging is delaying a payment for as long as possible.
• Effective if the company has a strong view about future movements in the exchange
rate.
Limitations of leading and lagging:
• Early payment will cost a company the interest foregone on the funds that have been
disbursed already.
• The payee will not be happy if a payment becomes overdue, particularly if the currency
is expected to fall.
• Requires the company to take a speculative view on exchange rates. There is a risk
that the company will be wrong.
Offsetting
Matching:
• Involves matching assets and liabilities in the same currency.
• Financing a foreign investment with a foreign loan would reduce exposure to the
exchange rate.
Netting:
• Involves the use of foreign currency bank accounts.
• If the company knows it will be both receiving and paying in foreign currency, it can
reduce exchange risk by using foreign receipts to cover foreign payments.
• Netting works best if the dates of the receipts and payments are as near together as
possible.
• Netting can be done across the group by a treasury function.
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Pooling:
• A system of managing cash.
• When a business has several bank accounts in the same currency, it may be able to
arrange a system with bank(s) whereby the balances on each bank account in the same
currency are swept up into a central account at the end of each day, leaving a zero
balance on every account except the central account.
• Does not hedge against FX risk but can be an efficient system for cash management.
• Avoids overdraft costs on individual bank accounts.
• Enables the treasury department to make more efficient use of any cash surplus.
• Pooling can also be implemented by subsidiary companies.
Countertrade:
• This involves parties exchanging goods and services of equivalent values.
• This is old-fashioned bartering and avoids the use of any type of currency exchange.
• Tax authorities discourage this method.
• If cash does not exchange hands, it can be difficult to establish the value of the
transaction and any related sales tax payable.
• Countertrade is not very popular; it leads to disputes with the tax authorities and takes
up management time.
6. External hedging
External hedging is hedging with the use of the money markets:
• Forward exchange contract
• Money market hedge
• Futures
• Options
• Swaps
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Netting centres
• A treasury management technique used by large companies to manage their
intercompany payment processes.
• Involves the use of many currencies.
• Yields significant savings from reduced foreign exchange trading.
• Collates batches of cash flows between a defined set of companies and offsets them
against each other so that just a single cash flow to or from each company takes place
to settle the net result of all cash flows.
• The netting process takes place on a cyclical basis, typically monthly.
• Managed by a central entity called the netting centre.
• The objective of the netting centre is to reduce the overall foreign exchange volume
traded and thereby cut the amount of foreign exchange spread paid by the company to
manage all of the currency conversions.
7. Currency Forward Contracts
• An agreement to buy or sell a specific amount of foreign currency at a given future date
using an agreed forward rate.
• The most popular method of hedging exchange risk.
• The entity is able to fix in advance an exchange rate at which a transaction will be made.
• The risk is taken by the bank, which is in a better position to manage its exposure.
• A proportion of the exposure will normally be avoided by writing forward contracts for
opposite trades on the same day.
Features and operations
• Forward contracts are a commitment.
• They have to be honoured even if the rate in the contract is worse than the rate in the
market.
• They are quoted at a premium or discount to the current spot rate.
Note: Discount means that the currency being quoted (e.g. US dollar) is expected to fall in
value in relation to the other currency (e.g. sterling).
A discount is referred to as “dis”, and a premium is referred to as “prem”.
These can be quoted in cents, i.e. USD 0.01, and shown as “c” in the quote.
Key for exam questions:
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Use the following rule for obtaining a forward rate from the spot rate:
★ Add a forward discount to the spot rate
★ Subtract a forward premium from the spot rate
Note: this rule is only applicable where the exchange rate is quoted as the AMOUNT OF
FOREIGN CURRENCY TO A HOME CURRENCY UNIT.
Please note that discounts and premiums are derived from the interest rate parity formula in
theory.
Test Your Understanding 3: Currency forward contract
Marino Inc, which is a company based in Ireland, sold goods to the value of USD 3.3 million. Receipt
is due within 90 days.
The current spot rate is EUR1 = USD 1.2430-1.2190.
There is a three-month discount forward of 2.5-1.5 cents.
What is the amount of EUR that Marino Inc will receive under the forward contract? Please
provide your answer up to the nearest full number.
Advantages Disadvantages
Simple A potential credit risk arises
The company is contractually bound to sell a
Low transaction costs currency that it may not have received from its
customer.
Purchased from high street banks Lack of upside potential
Fix the exchange rate
Tailor-made, flexible regarding amount and
delivery period
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8. Money Market Hedges
• A money market hedge involves exchanging currencies immediately and using the
interest rates of both countries to hedge against movements in the exchange rate.
• The money market uses the principle of interest rate parity.
Features and operations
• The basic idea of a money market hedge is to create assets and liabilities that mirror
future assets and liabilities.
• Currencies are loaned or deposited on the date of the transaction.
• The loans or deposits accrue and earn interest.
• At the cash point, the loan is paid, and deposits are taken out.
• Rule: The money required for the transaction is exchanged today at the spot rate and
is then deposited/borrowed on the money market to accrue to the amount required for
the transaction in the future.
• Note: Interest rates are used for depositing/borrowing. The rates are usually quoted per
annum. If you require a six-monthly rate, simply divide by 2.
Characteristics:
• The basic idea is to avoid future exchange rate uncertainty by making the exchange at
today’s spot rate instead.
• This is achieved by depositing/borrowing the future currency until the actual commercial
transaction cash flow occurs.
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Future Foreign Currency Cash Flow:
Payment Receipt
NOW:
NOW:
* borrow the present value of
* borrow in domestic currency the future receipt
* buy the present value of the * sell today at spot
future payment today at spot
* place domestic currency on
* place a deposit deposit.
FUTURE:
FUTURE:
* settle liability with receipt
* use deposit to pay supplier from customer
Test Your Understanding 4: Money Market Hedge
A customer based in UK owes Billag (A US company) £20,000 to be paid in 6 months’ time.
The USD/GBP forward rate is 1.3010 – 1.3105 and the spot rate is 1.3310 – 1.3400.
Interest rates in US to borrow are 10% and to lend 9%. In the UK interest to borrow are 9% and to
lend 8%.
If Billag chooses to use a money market hedge, how much will they receive in USDs in 6 months’
time? Provide the value up to 2 decimal places.
Advantages Disadvantages
Ensures that there is no currency risk They are complex
Fairly low transaction costs It may be difficult to get an overseas loan in the
case of foreign currency receipt
Offers flexibility
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9. Currency Futures
• This form of hedging is very similar to the use of a forward contract.
• The critical difference is that whereas using a forward contract requires the preparation
of a special financial instrument “tailor-made” for the transaction, currency futures are
standardised contracts for a fixed amount of money for a limited range of future
dates.
Features and operations
• Futures are derivative contracts and can be traded on futures exchanges.
• The contract that guarantees the price is separated from the transaction itself, allowing
contracts to be traded easily.
Process
Step 1: Set up
Set up the hedge by addressing three key questions:
1. Do we initially buy or sell?
The simplest approach is to identify the currency of the future contract and then do the
same to the futures that you intend to do to that currency.
2. Which expiry date should be chosen?
Settlement takes place in a three-month cycle (March, June, September, December).
It is normal to choose the first contract to expiry after the required conversion date.
3. How many contracts?
Step 2: Contact exchange:
Pay the initial margin, and then wait until the transaction settlement date.
Margin: the futures exchange requires all buyers and sellers of futures to pay a deposit to
the exchange when they buy or sell.
The deposit is called the initial margin. The margin is returned when the position is closed
out.
Step 3: Closing out:
At the end of the contract’s term, the position is closed out. This means that on expiry of the
contract the trading position is automatically reversed. Any profit or loss is computed and
cleared, and the underlying commodity is returned by the trader.
The value of the transaction is calculated using the spot rate on the transaction date.
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Test Your Understanding 5: Futures calculation
You are a treasurer in a German based company. You have a supplier in the USA, that your company
owes USD 15,000,000 on 28th of February. Today is 7th of January. You have decided to use March
euro futures contract to hedge with the following details:
Contract size: EUR 200,000
Prices given is USD per EUR.
Tick size USD 0.0002 or USD 25 per contract
You open a position today (7th of January) and you close it on 28th of February. Spot and relevant
futures prices are as follows:
Date Spot price Futures price
7th of January 1.2410 1.2460
28th of February 1.2310 1.2360
Calculate the financial position using the hedge described.
Advantages Disadvantages
Offer effective fixing of exchange rate A foreign futures market must be used for GBP
futures
No transaction costs Require upfront margin payments.
Are tradeable Are not usually for the exact tailored amounts
that are required
10. Currency options
A currency option is a right, but not an obligation, to buy or sell currency at an exercise price
on a future date.
• If there is a favourable movement in the exchange rate, the company will allow the
option to lapse to take advantage of the favourable movement.
• The right will only be exercised to protect against an adverse moment, i.e. the worst
case scenario.
Features and operations
• Options look great, but they have a cost.
• Options limit the downside risk but allow the holder to benefit from upside risk.
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• The writer of the option will charge a non-refundable premium for writing the option.
• It is possible for the holder of the option to calculate the gains or losses on using the
option:
• The gain if the option is exercised (the difference between the exercise price and
the market price of the underlying item).
• Less: the premium paid to purchase the option.
There are two types of options:
Call Option – gives the right to the holder to BUY the underlying currency.
Put Option – gives the right to the holder to SELL the underlying currency.
Options hedging calculations
Step 1:
Set up the hedge by asking four key questions:
• Do we need call or put options?
• Which expiry date should be chosen?
• What is the strike price?
• How many contracts?
Step 2:
• Contact the exchange
• Pay the upfront premium
• Wait until the transaction/settlement date
Step 3:
On the transaction date:
• Compare the option price with the prevailing spot rate to determine whether the option
should be exercised or allowed to lapse
Step 4:
Calculate the net cash flows.
“Be aware that if the number of contracts needed rounding, there will be some exchange at
the prevailing spot rate even if the option is exercised.”
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Test Your Understanding 6: Currency options
Morelli Sarl is a French company that is due to receive USD 5 million in 6 months.
The spot rate is USD 1.2200/EUR but the company is worried that the USD will weaken. They have
been offered a six month put option on USD at USD 1.2500/EUR, costing USD 0.015 per EUR.
If Morelli Sarl chooses to buy and then exercise the option, what is its net receipt in EUR?
Advantages Disadvantages
Offer the perfect hedge. Traded sterling options are only available in
foreign markets.
Many choices of strike price, date and There are high upfront premium costs (non-
premium. refundable).
Can be allowed to lapse if the future transaction
does not arise.
The Black Scholes Model
The basic principle of the Black Scholes Model is that the market value or price of a call
option consists of two key elements:
1. Intrinsic value:
• The difference between the current price of the underlying asset and its option strike
price.
• For the market value of a call option to rise, one or both of the following must occur:
• Current price of the underlying asset must increase.
• Strike price must fall.
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2. Time value:
• This reflects the uncertainty surrounding the intrinsic value and is impacted by three
variables:
• Standard deviation in the daily value of the underlying asset.
• Time period to expiry of the option.
• Risk-free interest rates.
Limitations of Black Scholes Model:
• Assumes that the risk-free interest rate is known and is constant throughout the option’s
life.
• The standard deviation of the returns from the underlying security must be accurately
estimated.
• Assumes that there are no transaction costs or tax effects involved in buying or selling
the options or the underlying items.
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12. Forex Swaps
• In a forex swap, the parties agree to swap equivalent amounts of currency for the period
and then reswap them at the end of the period at an agreed swap rate.
• The swap rate and the amount of currency are agreed between the parties in advance.
• This is called a fixed rate swap.
Objectives of swap:
• To hedge against forex risk, possibly for a longer period than is possible on the forward
market.
• To access capital markets in which it may be impossible to borrow indirectly.
Currency Swap:
Allows the two counter-parties to swap interest rates commitments on borrowings in different
currencies.
Has two elements:
• An exchange principle in different currencies.
• An exchange of interest rates.
The swap of interest rates can be fixed for fixed or fixed for variable.
Test Your Understanding 7: Currency swap
PTA Ltd is a UK company looking to expand into the USA. It wants to raise USD 6 million at a variable
interest rate. It has been quoted the following:
USD LIBOR + 80 points
GBP 1.9%
Khan Inc is an American company looking into refinance an existing loan of GBP 4.8 million at a fixed
rate. It can borrow at the following rates:
• USD LIBOR + 60 points
• GBP 3.2%
The current spot rate is USD 1 = GBP 0.80
Calculate the saving made by both companies if they enter into the currency swap.
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Solution to Test Your Understanding 1 on PPPT
1.032
1.41 × = 𝑈𝑆𝐷 1.3965
1.042
Solution to Test Your Understanding 2 on IRPT
1.022
0.2764 × = 0.2652 𝐶𝐻𝐹
1.065
Solution to Test Your Understanding 3 on currency forward
contract
Marino Inc expects to receive a receipt in USD and therefore wishes to buy EUR from the bank. The
bank will sell EUR high and therefore the rate will be 1.2430 (current spot). The discount of 2.5 cents
must be added to the rate, therefore giving a rate of 1.2680.
The EUR receipt is therefore USD 3.3m/1.2680 = 2,602,524 EUR.
Solution to Test Your Understanding 4 on currency forward
contract
The company should borrow from the bank just enough to end up owing exactly USD 20,000.
Amount borrowed: USD 20,000/1.3105 = GBP 15,261.35
which should be converted into USD at spot
GBP 15,261.35 / 1,34 = USD 11,389.07
They should then invest this for 6 months in the US:
USD 11,389.07 * 1.045 (half of 9% as it is half a year) = USD 11,901.58
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Solution to Test Your Understanding 5 on futures calculation
Step 1 Buy or sell?
We need to sell EUR to buy USD. We need to SELL EUR futures now.
Which expiry date?
The first to expire after the transaction date – so March.
How many contract?
Cover 15m/1.2460 = EUR 12.038.523 m
So using EUR 200,000 contracts 60.19 which we round up to 60 contracts.
Step 2 Contact the exchange – state the hedge
Sell 60 contract March futures at a futures price EUR1 / USD 1.2460
Step 3 Calculate profit/loss in futures market by closing out the position
Initially: sell at 1.2460
Close out: Buy at 1.2360
Difference is USD 0.01 per EUR 1 profit
60 x EUR200,000 covered, so total profit is
0.01 x 60 x 200,000 = USD120,000
Transaction at spot rate on 28th February
Need to pay USD 15m less 0.12 = USD 14,880,000
which is needed to be paid at spot rate of EUR1/USD1.2310
Cost in EUR therefore is EUR 12,087,734
Solution to Test Your Understanding 6 on currency options
The EUR received upon exercise will be 5,000,000 / 1.2500 = EUR 4,000,000
The cost of the option will be 0.015 x 4,000,000 = USD 60,000
At spot this cost in EUR is USD 60,000 / 1.22 = 49,180.33
Therefore the net receipt will be 4,000,000 – 49,180.33 = EUR 3,950,819.67
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Solution to Test Your Understanding 7 on currency swaps
When PTA Ltd Khan Inc
Now
Borrow from banks GBP 4.8m at 1.9% USD 6m at LIBOR + 0.6%
Exchange principals Pay GBP 4.8m to Khan and Pay USD 6m to PTA and receive
receive USD 6m GBP 4.8m
End of the year
Pay interest to banks Pay GBP 91,200 interest Pay USD 6m x (L+0.6%) interest
Exchange interest Pay Khan USD 6 x (L+0.6%) and Receive USD 20m x (L+0.6%) and
based on swap terms receive GBP 91,200 pay GBP 91,200 to PTA
Swap back principals Pay USD 6m to Khan and Pay 4.8m to PTA and receive USD
receive GBP 4.8m 6m
Net result
Interest costs:
Without swap USD 6m x (L+0.8%) GBP 4.8m x 3.2% = GBP 153,600
With swap USD 6m x (L+0.6%) GBP 4.8m x 1.9% = GBP 91,200
Saving USD 6m x 0.2% = USD 120,000 GBP 62,400
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13. Chapter summary
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