Currency SWAPs for individuals?

Question

Can a currency SWAP be used by private investors? NOT JUST COMPANIES. I have money in a bank in Iceland whose currency does not trade on FOREX markets. However my bank is a market maker for the FOREX system used IN Iceland. If i just knew how to best utilize a currency SWAP.

Answer 1

The short answer is "no".

Here's why:

A currency swap is an over-the-counter security that is not standardized. The non-standard contract is basically saying Party A will pay Party B the difference between where currencies end up in the future based on a set dollar amount principal. Since it is between two parties with no escrow, there is default risk. No offense, but no one is going to take you on as a counter-party due to your default risk.

Currency forex contracts tend to be in the millions of dollars. 'Nuff said.

If you want to neutralize your Krona exposure (which you may not want to do if you are Icelandic and plan on returning there), then the best ways to neutralize your currency exposure is to either sell the krona for another currency (which then opens up another can of worms because now you're long another type of currency) or build a Krona liability. You can build a krona liability by getting a loan. There is a third way... build your own "swap" by writing your own contract with someone who wants to go short on the Krona in the same amount that you want for the same amount of time period - but the chances of that are miniscule. And then you have to trust them, as well.

There is a fourth alternative. You can use futures on index traded currencies that have the highest correlations to the IKR. I know that Norweigian, Swedish and Finnish currencies are loosely correlated with the IKR. You will hedge away some risk, but still have some risk.

Sorry. I have no perfect answer for you.