Question
A multinational corporation with subsidiaries in
multiple countries is exposed to significant currency risk due to fluctuations in exchange rates. The company's CFO is exploring financial derivatives to mitigate this risk and ensure predictable cash flows. The CFO is particularly interested in a derivative that involves the exchange of principal and interest payments in different currencies, effectively locking in exchange rates and mitigating the impact of currency fluctuations on the company's cash flows. Which specific type of derivative would best suit the CFO's needs?Solution
Currency swaps involve the exchange of principal and interest payments in different currencies, allowing companies to effectively lock in exchange rates and mitigate the impact of currency fluctuations on their cash flows.
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