Infinbank secures $10 million in fixed-rate financing for 3 years from the International Finance Corporation (IFC). The loan rate is fixed at 4% per annum for three years and the loan amount will be withdrawn and used in full shortly after the disbursement. Given the exchange rate risk, Infinbank would like to hedge its UZS/USD exposure and enters into a currency swap with IFC to exchange payments based on fixed interest on both currencies. Both UZS and USD interest rates are fixed. Infinbank will pay 18% interest in UZS and receive 3.5% interest in US dollars. The spot rate in effect on the date of the agreement establishes what the notional principal is in the target currency. In this case, Infinbank is swapping USD into UZS, at 10 500 UZS per USD. 

Illustrate the structure of the swap, demonstrate the cashflow streams under this swap, and explain how the currency exchange rate risk will be hedged under the swap.

Answer rating: 100% (QA)

Currency swap forward contracts are often used by companies with foreign market exposure to hed... View the full answer