Hedging an Account Payable Case Study Example | Topics and Well Written Essays - 1000 words

Hedging an Account Payable - Case Study ExampleThis financial agreement is a swap that involves the ex qualify of principal and interest in unrivaled currency for the alike(p) in another currency after a specific period of time. It is considered to be a alien exchange transaction nevertheless is not postulate by law to be shown on the ratio sheet.In this type, there should not only be a need for our US based go with to acquire Pounds but also the UK supplier needing US dollars. If such is the case, both companies could arrange to swap currencies by establishing an interest rate, an agreed upon amount and a common maturity date for the exchange. Currency swap maturities be negotiable for at least 10 years, do them a very flexible method of alien exchange. This may be recommendable considering that the UK supplier has a hyponym in the US which may need US dollars for its transactions. The data available to us however indicates does not contain any information regarding thi s. (Investopedia, 2006a) (Wikipedia, 2006a).Rather a popular form of swap, the interest rate swap is a financial agreement in which one party exchanges a stream of interest for another partys stream. Interest rate swaps are normally fixed against floating but can also be fixed against fixed or floating against floating rate swaps. Interest rate swaps are used to change the companys exposure to interest rate fluctuations by swapping fixed-rate obligations for floating rate obligations or vice versa. To understand how each(prenominal) party would benefit from thisIt is considered to be a foreign exchange transaction but is not required by law to be shown on the balance sheet.In this type, there should not only be a need for our US based company to acquire Pounds but also the UK supplier needing US dollars. If such is the case, both companies could arrange to swap currencies by establishing an interest rate, an agreed upon amount and a common maturity date for the exchange. Currency s wap maturities are negotiable for at least 10 years, making them a very flexible method of foreign exchange. This may be recommendable considering that the UK supplier has a subsidiary in the US which may need US dollars for its transactions.