Securities and International Financial Management

Securities and International Financial Management foreign currency loan is a loan in which is repayable in a currency other than the currency of the country in which the borrower is a resident in. Typically the interest rate charged on a foreign currency loan is based on the interest rates applicable to the currency that the loan is denominated, or issued, and not the interest rates that apply to the currency of the borrower's country of residency. For this reason, a foreign currency loan can be beneficial when the interest rate on the foreign currency in which the loan is based on is significantly lower than the rate that the borrower can get on a loan borrowed in his or her own resident country's currency system.

Of course the downside of this is that the borrower is obligated to have to repay the loan in a currency of another country and international currency rates are constantly changing. Thus, a borrower could end up paying more or less than what they borrowed. For example, if the borrower's domestic currency, or the currency of the nation they reside in, becomes stronger as compared to the currency in which the loan is issued in, then the borrower makes a net capital savings as it cost the borrower less in domestic currency to fully repay the foreign currency loan. On the flip side, if the exchange rate on the currency of borrower's resident country weakens as compared to the currency in which the loan is made in, then the borrower makes a net capital loss as it cost him or her more in their domestic currency to repay the foreign currency loan.

In order to assist with managing the risks associated with a foreign currency loan, it is highly advised that a borrower seek the services of a foreign currency loan manager and thus set up a managed currency loan. The benefit of such a program is that it significantly reduces the borrower's risk exposure because the manager is able to switch the borrower's debt in and out of different foreign currencies and the currencies change in value against the base currency. However, such a program has its own risks associated with it in that often times the manager must increase the net value of the borrower's debt in order to react to adverse movements in the currency markets.

There are also non-qualitative, or financial risks, associated with foreign currency loans. Namely, because foreign currencies can be effected by such uncontrollable as political, governmental and natural factors, a foreign currency can suddenly change in a manner that either significantly benefits or disadvantages the borrower. For example, often time the rate of a foreign currency is based on such things as internal, regional or international political conditions. If a particular country has a significant political upheaval, the instability associated with such an event can have a negative impact on a nation's economy, which of course effects the foreign currency exchange rate and, thus, the borrowers investment. When such an event happens to a nation with a dominant currency, this change can have devastating effects on a loan, as was the case following the September 11, 2001 terrorist attacks on the United States.