Blue Chip Swap
What Is a Blue Chip Swap?
Blue chip swap portrays a type of international asset trading in which an investor purchases a foreign asset, generally at a depreciated neighborhood price, and afterward trades that asset in a domestic trade, ordinarily capitalizing on a depreciated exchange rate.
Blue chip swaps can be very profitable for certain investors when there is an imbalance in exchange rates, or in an exchange rate at which the supply for currency satisfies the need.
Figuring out Blue Chip Swaps
A blue chip swap happens when a domestic investor purchases a foreign asset, including bonds or currency, and afterward transfers the purchased asset to a offshore domestic bank branch. Much of the time, the domestic investor works with a partner who transfers assets to the foreign branch for their benefit. The U.S. investor most likely got a discounted price on the asset, plus he likewise exploited depreciated exchange rates, subsequently making money in the transfer to U.S. dollars. All things considered, blue chip swaps were utilized to legally move money all through countries like Brazil and Argentina.
The term "blue chip swap" is utilized in the common and financial press to depict a type of international asset trading that was conspicuous in South America during the 1990s and mid 2000s, especially in Brazil and Argentina. This type of trade became well known when Argentina was encountering hyperinflation and laid out capital control laws. At the point when Argentina disposed of its fixed exchange rate in 1991, it tied its peso to the U.S. dollar. The exchange rate plunged, which made it a perfect time for blue chip swaps.
History of Blue Chip Swaps in Argentina
Blue chip swaps initially became conceivable as a result of Brazilian and Argentinian capital control laws that diminished the amount of capital flow into and out of the country. In spite of the fact that Argentina's laws specifically precluded direct foreign investments in the countries' derivative markets, blue chip swaps permitted investments in derivatives to proceed.
Such trades were unregulated for a long time, however control regulations started to arise that forced least holding periods for bonds transferred abroad. Under prior Argentinian law, the seller of a bond was required to have it in stock for 72 hours or more.
This type of exchange became conspicuous in Argentina in view of that country's economic history of saving its wealth in U.S. dollars, in response to a long history of inflation crises in Argentina returning to the 1970s. These crises diminished confidence in the Argentinian peso and initiated an especially extreme period of hyperinflation in Argentina somewhere in the range of 1989 and 1990.
In response, Argentina carried out a fixed exchange rate in 1991. At times alluded to as the convertibility plan, this rate tied the Argentinian peso to the U.S. dollar in a balanced relationship. This plan increased interest rates and prompted periods of recession that endured into the mid 2000s.
For the next decade, Argentina abandoned the fixed-rate plan for a managed float plan that sent the exchange rate for the peso diving in relationship to the dollar and led to the blue chip swap market. Argentina forced controls on exchange rate vacillations again in 2011. These were facilitated in 2015, then fixed again in the election year of 2019. All through, blue chip swaps keep on being profitable for traders.
Features
- A blue chip swap is a type of international trading where an investor purchases a foreign asset, for the most part at a depreciated nearby price, and afterward trades that asset domestically, generally at a higher cost.
- Blue chip swaps were famous in South America during the 1990s and mid 2000s, especially in Brazil and Argentina.
- Blue chip swaps generally capitalize on a depreciated exchange rate; so they can be entirely profitable when an imbalance in exchange rates exists.
