A model of currency swaps is developed where swaps provide superior hedging capabilities. Under the swap two parties in effect 'lease' assets that they own to one another for use as collateral, creating supewrior loan-collateral matching. This superior matching is reflected in lower borrowing costs to both agents (creating a dominant borrowing and hedging method). The swap contract is self-enforcing due to a mutual double bonding arrangement, where each side has an interest in the continuation of the exchange relationship. (JEL G2, F3).
ASJC Scopus subject areas
- Economics and Econometrics