Indo Japan Deal

8/2/2019 Indo Japan Deal

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$ 15 billion currency swap

deal between India and Japan


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A swap is an agreement between two parties to exchangesequences of cash flows for a set period of time.

Usually, at the time the contract is initiated, at least one ofthese series of cash flows is determined by a random or

uncertain variable, such as an interest rate, foreign exchangerate, equity price or commodity price.

Conceptually, one may view a swap as either a portfolio offorward contracts, or as a long position in one bond coupled with

a short position in another bond.

The two most common and most basic types of swaps: the PlainVanilla Swap interest rate and Currency Swaps.


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A swap is an agreement between two parties to exchange(swap) payments at certain dates in the future.

Counterparty A Counterparty B

As payments to B

Bs payments to A


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The payments can be Different currencies (currency swap)

Different interest payments (coupon swap)

Different commodities (e.g. oil swap)

Payment dates are fixed at settlement and extend until afixed expiration date.

Payments are determined at least one payment period inadvance, (payment in arrears).


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(one leg floats with market interestrates)

INTERESTRATE SWAP

(one leg in one currency, other legin another)CURRENCYSWAP

(one leg floats with market equityreturns)

EQUITY SWAP

(one leg floats with marketcommodity prices)

COMMODITYSWAP


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An interest rate swap is a popular andhighlyliquidfinancial derivative instrument.

In which two parties agree to exchange interest ratecash flows, based on a specified notional amount froma fixed rate to a floating rate (or vice versa).

Interest rate swaps are commonly used forboth hedging and speculating.
http://en.wikipedia.org/wiki/Swap_(finance)http://en.wikipedia.org/wiki/Market_liquidityhttp://en.wikipedia.org/wiki/Derivative_(finance)http://en.wikipedia.org/wiki/Hedge_(finance)http://en.wikipedia.org/wiki/Speculationhttp://en.wikipedia.org/wiki/Speculationhttp://en.wikipedia.org/wiki/Hedge_(finance)http://en.wikipedia.org/wiki/Derivative_(finance)http://en.wikipedia.org/wiki/Derivative_(finance)http://en.wikipedia.org/wiki/Derivative_(finance)http://en.wikipedia.org/wiki/Market_liquidityhttp://en.wikipedia.org/wiki/Swap_(finance)


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A currency swap is a foreign-exchange agreementbetween two parties

To exchange aspects (namelythe principal and/or interest payments) of a loan inone currency for equivalent aspects of an equal in netpresent value loan in another currency.
http://en.wikipedia.org/wiki/Loanhttp://en.wikipedia.org/wiki/Interesthttp://en.wikipedia.org/wiki/Loanhttp://en.wikipedia.org/wiki/Net_present_valuehttp://en.wikipedia.org/wiki/Net_present_valuehttp://en.wikipedia.org/wiki/Net_present_valuehttp://en.wikipedia.org/wiki/Net_present_valuehttp://en.wikipedia.org/wiki/Net_present_valuehttp://en.wikipedia.org/wiki/Net_present_valuehttp://en.wikipedia.org/wiki/Net_present_valuehttp://en.wikipedia.org/wiki/Loanhttp://en.wikipedia.org/wiki/Interesthttp://en.wikipedia.org/wiki/Loan


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Example:

Situation: ExxonMobil has USD debt, but wants toincrease EUR debt.

Solution: A swap.Data:

ExxonMobil pays 3.5% in EUR, with a Notional principal: EUR 2 M

Swap Dealer pays 4.75 % in USD, with a Notional principal USD 2 M

Frequency of payments = 6-mo. Duration = 4 years

St = 1.31 USD/EUR.


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Every six month, ExxonMobil pays EUR 35,000, while it receivesUSD 47,500.

Note that Exxon and SD have fixed the exchange rate for 4 years

at:St+i = USD 47,500/EUR 35,000 = 1.357143 USD/EUR i=6,12,.,48.

Exxon SwapDealer

EUR 35,000

USD 47,500


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Currency swaps have two main uses:

To secure cheaper debt (by borrowing at the best

available rate regardless of currency and thenswapping for debt in desired currency using a back-to-back-loan).

To hedge against (reduce exposure to) exchange ratefluctuations.


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The Indian rupee, affected by both domestic issuesand the global economic crisis, has become the worstperforming Asian currency, having depreciated about15 percent against the U.S. dollar in recent months.

In order to Protect this Indian Prime MinisterManmohan Singh and Japanese Prime MinisterYoshihiko Noda, decided to enhance the earlier

bilateral currency swap arrangement from $3 billion to(U.S.) $15 billion.
http://www.upi.com/topic/Yoshihiko_Noda/http://www.upi.com/topic/Yoshihiko_Noda/http://www.upi.com/topic/Yoshihiko_Noda/http://www.upi.com/topic/Yoshihiko_Noda/http://www.upi.com/topic/Yoshihiko_Noda/http://www.upi.com/topic/Yoshihiko_Noda/http://www.upi.com/topic/Yoshihiko_Noda/http://www.upi.com/topic/Yoshihiko_Noda/http://www.upi.com/topic/Yoshihiko_Noda/


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In recent years many countries has entered in thecurrency swap deals mainly to stabilize theircurrency and boost trade. Few of them are as

under: In October 2011, Japan and South Korea

entered in deal of $ 70bn to stabilize Asiasfinancial market

In Dec 2011, China and Pakistan signedbilateral currency swap agreement to boost

bilateral trade


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In Feb 2012, China and Turkey has signed $ 1.59 bncurrency swap agreement to enhance financial cooperationand promoting bilateral trade and investment

Republic of China has multiple year swap currencyagreements of with Argentina, Belarus, Hong Kong,Iceland, Indonesia, Malaysia, Singapore, South Korea,

Japan and Uzbekistan to strengthen regional economic ties

and financial stability


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Means that Japan will accept rupees and give dollars to RBI up toa stipulated limit, and similarly RBI will take yen and senddollars to Japan if speculators seek to thrash down the respectivecurrencies.

Currency swap would take place between the Reserve Bank ofIndia and its counterpart in Tokyo, the Bank of Japan.

The two central banks would give each other dollars to stabilizetheir currencies, in case of need.

A dollar swap arrangement can help emerging economies as itpromises a supply of dollars in an emergency.

The previous currency swap deal between the two nations,signed in 2008, has expired.


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The pact will allow them to swap their currencies for US dollarsand tap into each other's foreign exchange reserves. Japan hasthe world's second-largest foreign exchange reserves of about $1.3trillion, after China, whose reserves top $3 trillion.

It will help to increased volatility in both the Japanese yen andthe Indian rupee.

The deal will help both nations stabilise their currencies,especially in the current uncertain global economic environment"A dollar swap arrangement can help emerging economies as itpromises a supply of dollars in an emergency.


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It would further strengthen financial cooperation,contribute to ensuring financial market stabilityand further develop growing economic and trade

ties between their countries


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Government of India, issues bonds to oil marketing companiesto compensate them for losses on sales of petroleum productsbelow cost.

Oil Companies sell these bonds to LIC, Banks etc to recover themoney.

To prevent the downfall of Rupee, RBI can open a Forex-window,where Oil cos line up and exchange their oil-bonds in lieu ofdollars from RBI.

For this activity: RBI can exchange its rupees to Japanese bankand get dollars and then RBI gives that dollars to Oil cos. in lieuof Government bonds.


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The pact is expected to boost the Indian rupee which hasbeen Asia worst performing currency this year.

It open up a new window for Indian corporate to raisecheap yen-denominated loans (The Japanese central bank

has kept its interest rates near zero over the last 10 years)Helps country from short-term liquidity problems as it can

borrow from its partners foreign reserves to absorb heavyselling pressure on its currency.

Help to Boost Japanese Investment in India

It acts as an Insurance to Indian Foreign reserve whichis around $300 billion , equivalent to eight months ofimports.


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Japan is expected to export more auto-parts and steelproducts to India and import more agricultural and marineproducts from India.

Japan gains another avenue of using its $1.2 trillion of

currency reserves as it seeks to bolster its presence ininternational finance and foster a closer trade relationship

withAsias third-largest economy.

Japan, which has just lifted a longstanding ban on the

export of weapons, will be looking to sell defence hardwareto India

Increased volatility in the Japanese yen
http://topics.bloomberg.com/asia/http://topics.bloomberg.com/asia/


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Thank You

Indo Japan Deal

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