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Username: Fluffy

Rating:
Guru Stars

Asked to: Jun Wang

Date Created: 18 Apr 2015
Category 40
Tag Forex
Question What does back-to-back loan mean?
Advice from Guru
Hello Fluffy,

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.
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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