Unlike the two previous transactions, in which the dealings are between two or more corporations, bank swaps involve a third party-a bank. This type of swap evolved from the traditional bank-to-bank swap through which two commercial banks in different countries would acquire temporarily needed foreign currencies. Such swaps were prevalent in dealings with developing countries whose currencies were not freely convertible or accepted. Today MNCs make frequent use of bank swaps.
The procedure is similar to those described above. A U.S. MNC in San Diego, for example, will deposit $1 0,000 to the credit of a Mexican bank. The Mexican bank will lend the equivalent number of pesos ($ 1 0,000 x 1,500 = 15,000,000, at the current exchange rate) to the U.S. MNC's subsidiary in Mexico, which will use the money to expand its facilities. At an agreed-upon future date, the Mexican bank will repay the $10,000 and the U.S. subsidiary will repay the 15,000,000 pesos. Because U.S. dollars are lent and repaid and Mexican pesos are lent and repaid, there is no cross-border transaction and, therefore, no foreign exchange risk; yet both parties obtain the foreign currency they desire.
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