Your own currency devalues and thou have foreign currency debt. How to solve that?

Consider / suppose you are a bank, an entrepreneur or a state foreign currency loan of the Republic of Turkey!

Turkish lira TRX is currently devaluing against € or US $.

What can you do now?

Well you can of course reduce risk via a forex pair swap.

In case, that you want to hedge the risk (that TRY don`t fall to much against € OR US$),  you bet on falling TRY/€ forex swap pairs in derivate secondary markets or if this doesn`t exist for huge amounts of TRY, than bet on rising up €/TRY US$/TRY for that case. 

What will happen with that hedge?

In case, that TRY looses more value against € or US$, your risk reducing swap works in the opposite direction.

Your losses will be smoothed out straight.

Attention for case if TRY will regain value against € / US$.

If TRY regains  value against € or US$, your foreign currency credit rate, will not become cheaper, because your hedge swap will loose for that case.

What we ignore in that simple example?

We ignore prime rate and credit rate changes, that could be triggered, when FED or ECB increases or decreases prime rates.

Kind regards,

-he