Interco Financing and Swaps

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Adriaan“a swap is a contract where two parties exchange something, so a cash flow or liability, and based on specified terms. And they're usually used to hedge against specific risks, risks such as, uh, interest rate fluctuations or currency risks. Uh, in financial transaction pricing, we see a lot of comparability adjustments based on swaps where For example, if you have a, a tested transaction which is a fixed— which has a fixed interest rate, uh, your comparables have floating interest rates, yeah, you basically have to do something because, uh, a lot— a base rate plus 3% spread, and you cannot really compare it with a 6% interest fixed rate. So you have to do something. So that's where, uh, a swap comes in. So you have the floating-fix swap, for example, where you look into the base rate plus the spread that was applied for the, um, comparable transaction. And yeah, you look at the specific terms and conditions of the transaction, also at the issue date of the transaction, and then you swap that on the date of the transaction into what it would have been based on a fixed rate. So that's basically the swapping contract where you swap the floating part with a fixed component, and that makes it— the transaction more comparable to the tested loan transaction, because then you basically compare fixed with fixed. And apples with apples. And the same goes for, for cost currency swaps. So where you have a euro-denominated loan, uh, that's your Tesla loan transaction, for example, and your comparables are US dollar transactions, and then you can also use a swap to, to account for that difference. So it's basically a comparability adjustment within transfer pricing.”