Swaps in India

The role of treasury has come about in response to the changing economic and financial environment. If there is one word to describe how business is today versus half a century ago, the word would be risky. The treasurer as a facilitator of transactions faces many daunting responsibilities. Among these responsibilities are the use of financial products which have appeared in response to the growth of uncertainty. Borrowers in today’s markets have a variety of ways of raising money. Some borrow in foreign currency because they have revenues in that currency which was used to service debt. Others borrow in another currency because they believe that the currency being borrowed will weaken, thereby reducing the overall cost of borrowing. They will fully hedge their foreign borrowings by means of a foreign exchange swap transaction Alternatively, one party’s comparative advantage over the other allows them to borrow funds at minimal cost either through fixed or floating rates. Similarly the weaker borrowers have access to floating fixed rates at a higher cost. By exchanging their payment obligations through a swap, both parties are able to obtain a lower cost of funds. So, the study is an attempt to determine how interest rate and foreign exchange exposure can be hedged through an innovative financial product called swaps.