Currency Rate Swap between IBM and World Bank

Code : INB0007

Year :

Industry : Investment Banking, Financial Services

Region : US

Teaching Note:Available

Structured Assignment :Not Available

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Introduction:On Tuesday, August 25, 1981, IBM and World Bank entered into a currency swap deal, whose net effects were that (1) IBM was able to earn capital gain without paying a single cent as tax on it and (2) the World Bank was able to get low cost funding, which was not possible through direct borrowing. Earlier, on Tuesday, August 11, 1981, in connection with the swap deal, US bond market investors got a unique instrument for investment which had almost zero default risk and the coupon rate was more than that of treasury bills. It was one of those satisfying financial deals where each party (the World Bank and IBM) believed it had emerged as the clear winner.

Swap was originally developed by banks in the UK to help large clients circumvent UK exchange controls in the 1970s. Earlier, currency swaps were in existence in the form of back-to-back/parallel loans. Parallel loans/back-to-back loans are currency exchange agreements wherein a UK holding company will lend Pounds (GBP) to the US subsidiary in the UK, and the US firm will lend US Dollars (USD) to the UK subsidiary in the US to avoid exchange controls. The first standard swap deal was a currency swap deal between the World Bank and IBM, which was arranged by Salomon Brothers .

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