Are there risks in currency swap agreements?

Currency swap refers to the exchange of two funds with the same amount, the same term, and the same interest rate calculation method, but different currencies. It also involves currency exchange with different interest amounts. So are currency swap agreements risky? Read the article below to find out.

Currency swap agreement is essentially a financial derivative, in which both parties to the contract pay an agreed amount of principal plus interest within an agreed period, based on an exchange rate and interest rate agreed upon by a certain formula. Responsibility for making currency exchanges. Usually currency swaps are not complicated. Based on the Sino-Russian swap hypothesis, it is estimated that China currently needs rubles, while Russia needs RMB. Once the currency swap is signed, China will issue RMB bonds with interest a and transfer the raised RMB to Russia, and Russia will Issue ruble bonds with interest b and transfer them to the Chinese party (this cash exchange is skipped in some contracts).

The key is that within the period, each party bears the interest payment of the other party, and the interest rates are different: China pays the ruble interest rate of b, and the Russian side pays the RMB interest rate of a. . At maturity, China will pay the principal in rubles and Russia will pay the principal in RMB. Currency swaps are used to hedge exchange rate and interest rate risks, mainly to hedge exchange rate risks. How to price a currency swap? There are three variables in pricing, namely the bond yield curves of both parties during the same period, as well as the current exchange rate and the outlook for future exchange rates of both parties. Stochastic processes will be incorporated into the complex mathematical pricing model. It is estimated that the China-Russia swap is not that complicated, and there are more political considerations than market considerations. Since this contract cannot be traded in the market, it has no market price, but it has an intrinsic value based on changes in exchange rates and interest rates. For one party, the value may decrease or increase.

Currently, the contract value is shrinking for China. Assume that when the contract was signed in October, 1 RMB was exchanged for 7 rubles. This exchange rate was used as a reference for the agreement. We paid 100 million yuan and he paid 700 million rubles. (If the contract were signed today, it is estimated that the negotiated price would be 100 million yuan to 900 million rubles). Therefore, the value of this agreement to China is currently decreasing. At this time, according to the agreement, Russia has the right to demand swaps at an exchange rate of 1 RMB to 7 rubles, and provide loans to Russia's Russian-Chinese trade importers, helping Russian businessmen to lock in the risk of depreciation of the ruble against the RMB exchange rate. Since you have signed a contract, you must implement it, otherwise it will be a breach of contract.

Assume that the RMB interest rate agreed upon when signing the contract is 1% and the ruble interest rate is 5%. Due to the replacement, we are responsible for the 5% ruble interest rate. Russia is responsible for the 1% interest rate on RMB. If the agreement states a fixed interest rate, the payment will not be affected by changes in market interest rates. We pay 35 million rubles a year in interest, he pays 1 millionRMB interest. When the contract expires, we will pay him a principal of RMB 700 million, and they will pay us a principal of RMB 100 million. The possible loss now is that the 700 million rubles are not fully received, so the direct loss is that according to the market price, 100 million yuan has far exceeded 700 million rubles, and can even reach 900 million rubles, of which 2 The price difference of 100 million rubles is a direct loss. Or if you don’t exchange it after it arrives in your account, you will still suffer the above losses. Some people say that if you exchange it after three years, there is no guarantee whether the loss will be offset, because the market is always changing.

Assuming that the ruble returns to 1:7 against the renminbi in three years, then if the ruble obtained now is used, it will cause permanent losses. The above assumes that both parties are rational people, the swap is for use, and there is a pricing mechanism for exchange rate and yield. If both parties are not economically rational people at all, the swap is not for use, and there is no accurate pricing mechanism based on exchange rate and yield. , the god doesn’t know whether this contract is a profit or a loss.