A Back-to-back loan is a loan agreement between entities in two countries in which the currencies remain separate but the maturity dates remain fixed. The gross interest rates of the loan are separate as well and are set on the basis of the commercial rates in place when the agreement is signed.
What is a ‘Back-to-Back Loan’
A back-to-back loan is a loan in which two companies in different countries borrow offsetting amounts from one another in each other’s currency. The purpose of this transaction is to hedge against currency fluctuations. With the advent of currency swaps this type of transaction is no longer used very often.
Explaining ‘Back-to-Back Loan’
In a back-to-back loan, a U.S. company would loan US$1000 to a U.K. company in the U.S., and the U.K. company would loan an equivalent amount (at spot exchange rates) in sterling to the U.S. firm in the U.K. Both companies get the currency needed without going to the forex market.
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