A dual currency bond is a bond in which interest payments, known as a coupon, are made in one currency, but the money paid in advance for the bond is in another.
Issuers of a dual currency bond can make a related exchange. This may be known as a dual currency bond exchange, although this concept may cause confusion as this arrangement does not derive from a bond exchange. Therefore, it is most commonly referred to simply as a dual currency exchange.
The precise functioning of a dual currency exchange can be very complicated and vary from case to case, depending, for example, on whether or not both parties have issued or purchased a bond. The general principle is that the two parties trade between currencies with the money used in all three stages of the bond process: the original purchase, coupon payments and redemption. The rate used for each exchange rate can be set in advance and therefore may differ from the currency market rate prevailing in each phase.
The more complicated forms of a dual currency exchange may involve an option; this means that a party has the right to make an exchange at a certain stage, but is not obliged to do so.
Purpose OF dual currency bond
Both sides in a dual currency exchange will come to an agreement with the intention of reducing the risk. This risk arose from the fact that the bond in question uses two different currencies, which could mean that the cost in real terms of issuing or purchasing a bond is different than expected. In other words, the party knows the amount he will pay or will be paid in foreign currency, but will not know what it will translate into his national currency.
The use of a dual currency exchange can give a company or investor greater certainty about the money they will pay or receive. This can make it easier to draw up financial plans and accurate investment value in the company’s balance sheet.
The use of a dual currency exchange is normally a form of hedging. This means organizing the agreement so that it pays off in circumstances that mean that a separate agreement will have a greater but negative effect on the party. With a dual currency exchange, the circumstances will be the movement of exchange rates.
The effect is that if things go wrong in the main deal, the party will earn money through the exchange; likewise, if things in the main affair are going well, the party will lose a little on the exchange. In both cases, both potential gains and losses are reduced. This reduces the risk to the company, while allowing it to enter into agreements involving large sums of money, which could allow it to access better terms.