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A back-to-back loan is used to avoid foreign exchange or cross-border transactions, as well as any foreign exchange risks. Back-to-back loans involve an agreement between MNCs in different countries to lend money to each other's subsidiaries in the subsidiaries' local currencies. For example, a German subsidiary in the United States that needs $20,000 will receive the money from a U.S. MNC with a subsidiary in Hamburg, West Germany. The U.S. subsidiary in Hamburg will in turn receive 40,000 deutsche marks (the dollar equivalent) from the German parent company in Hamburg. The result is that both subsidiaries receive the needed funds with no cross-border or foreign exchange transactions and, therefore, no risks.
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