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Whether a company is transacting in interest rate swaps or in currency swaps, the benefits are the same. In both categories of swaps the features are the same, that of derivatives. Such derivatives help to limit or to reduce the exposure to fluctuations in interest rates or to help a company acquire a lower interest rate than it would be possible to obtain otherwise. The interest rate swaps come in use as they allow a domestic firm to receive rates that are more profitable than a foreign company.
Instance Of Interest Rate Swap
A company A may be located in the US while a company B is located in England. A may need to take a loan in British pounds and B may need a loan in US dollars. The two companies can then engage in a swap to take advantage of the fact that each company stands to gain from better rates in their own countries. The result is savings in the interest rate due to the privileged access that each has in its own domestic market.
Benefits Of Swaps
Swaps help companies in the following manner:
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- They can hedge in the exposure of the inertest rate and reduce the uncertainty that comes in the cash flows for the future
- Debt conditions are reversed in swapping
- Currency of the future market conditions can be taken advantage of
- Currency and interest rate swaps are used as financial tools in order to lower the amount that is needed in order to repay a debt
- Companies can take advantage of the global market in a more efficient manner
- Two parties are brought together each of which has a unique advantage in different markets
There is however, a risk involved that one party may fail to meet their obligations but the benefits are usually greater for participating in such a swap transaction.