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FX Swaps


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  • Li L. Ong
  • Bergljot Barkbu
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    The proliferation of foreign exchange (FX) swaps as a source of funding and as a hedging tool has focused attention on the role of the FX swap market in the recent crisis. The turbulence in international money markets spilled over into the FX swap market in the second-half of 2007 and into 2008, giving rise to concerns over the ability of banks to roll over their funding requirements and manage their liquidity risk. The turmoil also raised questions about banks'' ability to continue their supply of credit to the local economy, as well as the external financing gap it could create. In this paper, we examine the channels through which FX swap transactions could affect a country''s financial and economic stability, and highlight the strategies central banks can employ to mitigate market pressures. While not offering any judgment on the instrument itself, we show that the use of FX swaps for funding and hedging purposes is not infallible, especially during periods of market stress.

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    Bibliographic Info

    Paper provided by International Monetary Fund in its series IMF Working Papers with number 10/55.

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    Length: 45
    Date of creation: 01 Mar 2010
    Date of revision:
    Handle: RePEc:imf:imfwpa:10/55

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    Keywords: Banks; Central bank role; Credit demand; Credit risk; Exchange rates; Financial institutions; Financial stability; Liquidity management; Stabilization measures; exchange rate; foreign exchange; hedging; financial derivatives; exchange rate volatility; derivative; foreign exchange derivatives; hedge; spot exchange rate; international reserves; financial derivative; domestic financial institutions; portfolio investment; derivatives market activity; exchange rate pass; derivatives market; forward exchange; money markets; present value; forward exchange rate; currency swaps; international money markets; exchange rate depreciation; foreign exchange market; exchange rate risk; volatility in exchange rates; derivatives markets; financial statements; financial system; exchange rate changes; hedging instrument; net present value; bonds; currency units; international banks; derivatives transactions; financial markets; prevailing exchange rate; derivatives instruments; hedges; cash flow; performance bonds; credit derivatives; international financial markets; exchange risk; currency exchange rate; volatile exchange rates; forward contract; exchange transactions; forward market; exchange rate movements; discounting; derivative contracts; exchange rate regime; foreign exchange risk; hedging tool; domestic currency exchange rate; currency markets; money market; liquid markets; currency exchange; foreign exchange transactions; financial assets; hedge funds; international standards; exchange reserves; derivative asset;

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