Hedge Swap
Hello all,
A has concluded a Euro money market loan with the B-bank with a par value of EUR 100,000. This is linked to the 3M-EURIBOR plus spread of 1.5 % points. The loan can be used in tranches at least EUR 25,000. The term of a tranche may be 3, 6 or 12 months. The interest rate is agreed before the payment of a tranche and is then also valid for the term (3, 6 or 12 months). The money market credit ends at the end of 2020. A has also concluded a swap with a foreign currency component (in CHF) with the C-bank. The reference value is EUR 100,000. The swap is linked to the 3M-Euribor. The term ends in 2018. A pays the fixed interest rate; C pays the Euribor. How can we demonstrate the effectiveness of the hedging relationship in this specific case?
Thanks and best!
Is this a homework assignment?
No, it is just a case I thought above.
I believe that there is no effective hedging relation because of different maturity date (2020 vs. 2018) and different currency (EUR vs. CHF).
But how could I argue that there is an effective hedging relationship ?
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