Currency swap w/o notional exchange

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Zubbo

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Hi all,
Doing an fx swap w/o exchange of notionals examples (below); I understand the mechanics of the swap and calculations but am missing the rationale. I feel like I’m missing the obvious here. My question is at the bottom after the example.
Example: Currency swap without a notional principal exchange
A firm will be receiving a semi annual cash flow of € 10 million. The swap rates in the United Stares and Europe are 6% and 5%, respectively. The current exchange rate is €0.9/$. Identify the appropriate swap needed To convert the periodic euro cash flows to dollars.

Answer:
For the euros, the NP= €I0,000,000/(0.05/2) = €400,000,000. The corresponding dollar amount is €400,000,000/0.9 = $444,444,444. Using these values for the swap, the firm will give the swap dealer €I0,000,000 every six months over the maturity of the swap for:

$444,444,444(0.06/2) = $13,333,333

My Question:
So if I convert the $13.3M back to EUR, I get exactly €12M, so the firm effectly swapped a €10M reciept for a €12M receipt? What am I missing here?
 
let us say the co. received 10 M E and had to convert to $ each period. That conversion would depend on the FX rate at that time. With the swap - there is no fx conversion involved - so that risk is effectively removed.
 
Definitely - but from this example, the co has hedged the FX risk and locked in an additional 2M euros. Looks like a win-win for the Co and a lose-lose for the Dealer/CP.
Intuitively I expect some cost (only refering to a 1 sided hedge) associated with hedging a risk.
 
You’re confusing a currency swap with a spot transaction.
The different interest rates are affecting the how much you’re getting at the end of the swap transaction; you’ll only see dollar proceeds being equal to the euro proceeds when reconverted at the exchange rate if the interest rates in the currency swap are equal.
Also, one can’t tell whether the the company has ‘won’ or ‘lost’ on the swap trade until future FX rates are known.
 
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