So far, we have explained the importance of the yield curve for building capital markets, which enables loans and swaps. Our goal is to build long-term forward markets for cryptocurrencies and digital assets, which could scale to a trillion-dollar business. This article describes how the currency swap emerged and explains why the World Bank and IBM entered into the first swap to establish a sophisticated borrowing technique, which led to the 40-year historic success in building the $600 trillion derivatives industry.
Disclaimer: The complete details of the swap have never been published in full. All information, assumptions, and scenarios provided here are created and simplified for educational purposes.
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Photo by Markus Krisetya on Unsplash
From August 1981 to the end of the fiscal year 1983, the World Bank carried out 58 currency swap transactions. The bank has raised about the equivalent of $2.5 billion in Swiss francs, Deutsche marks, Dutch gilders, Pounds sterling and Austrian schillings. About two thirds of swaps have been into Swiss francs (Staff Working Paper 640: World Bank Group).
The currency swaps lowered the Bank’s average cost of borrowing from 10% to 8.9% — David Bock
Swaps added liquidity and contributed to the development of the long-term forward market, which reduced the risk in trade finance and provided more effective asset/liability management (ALM) opportunities.
For importers/exporters, swaps offered advantages in increased certainty and lowered offshore fundings. For enterprises, swaps enabled offshore investments in domestic currency by reducing exposures from currency mismatch.
Typical Currency Swap (Source)
The following 4 steps are typical transactions from the Bank’s perspective.