Swap arrangements among national central banks a. enable central banks to conver

Question

Swap arrangements among national central banks

            a.         enable central banks to convert debt into equity

            b.         exist only under conditions of clean floating or completely flexible exchange rates

            c.         enable central banks to exchange currencies temporarily with other central banks in order to support the values of their own currencies

            d.         enable central banks to exchange key officials with each other so they can more effectively achieve international economic policy coordination.

Please explain your answer!

Explanation / Answer

c. enable central banks to exchange currencies temporarily with other central banks in order to support the values of their own currencies.

The swap lines are designed to improve liquidity conditions in the US, for example, and foreign financial markets by providing foreign central banks with the capacity to deliver US dollar funding to institutions falling within their jurisdiction at stressful market times. When a swap is made, the foreign central bank sells a specified amount of its currency to the Fed in exchange for dollars at prevailing market exchange rate. The Fed holds the foreign currency in an account in a foreign central bank. An agreement is accorded to this effect that the foreign central bank would buy back its currency at a specified future date at the same exchange rate.

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