An example will help you understand better:
An American company can borrow American dollars for 5%. However it requires Yuan to finance it's investment in China. It can do so by borrowing at a high rate of 10%.
A Chinese company can borrow Chinese Yuan for 3%. However it requires American Dollars to finance it's invesment in US. It can do so by borrowing at a high rate of 9%.
What these 2 companies can do is to just swap their loans (principal + interest).
Benefit of this swap is that:
- Lower interest rate payable
- Avoid volatility in exchange rate
- Better planning from knowing how much to pay back
An example will help you understand better:
An American company can borrow American dollars for 5%. However it requires Yuan to finance it's investment in China. It can do so by borrowing at a high rate of 10%.
A Chinese company can borrow Chinese Yuan for 3%. However it requires American Dollars to finance it's invesment in US. It can do so by borrowing at a high rate of 9%.
What these 2 companies can do is to just swap their loans (principal + interest).
Benefit of this swap is that: