Currency Swap

As we talked about the currency hedging in the Aspen’s case, a currency swap could be the good way of hedges. This is how the currency swap works. This is an exchange contract that two individual foreign companies make a contract that if company A needs to exchange into its local currency, then the company B swaps the currency in fixed rate. For example, the U.S company expands its market in Europe, and it is worried about fluctuations in Euro currency. The U.S company needs to find the European company which expands its market in the United Stats. If the U.S company makes huge profits in Euro, and the U.S company need the U.S dollar, but the current the U.S dollar currency market is so bad, then the U.S company can ask the European company, which already made a contract with the U.S company, to exchange currency into the U.S dollar with fixed rate. The European company performs in the United States, so the company would have enough U.S dollar to exchange with Euro. This is good for the both parties. Thus, I think this is the another good way to hedge in currency. However, when a company selects its a counterparty, the company should consider weather the counterparty is healthy and stable in financially.

http://en.wikipedia.org/wiki/Currency_swap