Definition
A Back-to-back loan is a loan agreement between entities in two countries in which the currencies remain separate but the maturity dates remain fixed. The gross interest rates of the loan are separate as well and are set on the basis of the commercial rates in place when the agreement is signed.
Back-to-Back Loan
What is a ‘Back-to-Back Loan’
A back-to-back loan is a loan in which two companies in different countries borrow offsetting amounts from one another in each other’s currency. The purpose of this transaction is to hedge against currency fluctuations. With the advent of currency swaps this type of transaction is no longer used very often.
Explaining ‘Back-to-Back Loan’
In a back-to-back loan, a U.S. company would loan US$1000 to a U.K. company in the U.S., and the U.K. company would loan an equivalent amount (at spot exchange rates) in sterling to the U.S. firm in the U.K. Both companies get the currency needed without going to the forex market.
Further Reading
- Federal Income Tax Consequences of Back-to-Back Loans and Currency Exchanges – www.jstor.org [PDF]
- Back to basics: the great recession and the narrowing of IMF policy advice – onlinelibrary.wiley.com [PDF]
- Back‐to‐Back Loans: A Fraud in Transition – onlinelibrary.wiley.com [PDF]
- The economics of Islamic finance and securitization – jsf.pm-research.com [PDF]
- The financial and economic crisis of 2008: A systemic crisis of neoliberal capitalism – journals.sagepub.com [PDF]
- Status of Gulf co-operation council (GCC) electricity grid system interconnection – ieeexplore.ieee.org [PDF]
- What is so organised about financial-economic crime?-The Belgian case – search.proquest.com [PDF]
- Derivatives markets: sources of vulnerability in US financial markets – books.google.com [PDF]
- Effects of the global economic crisis on Turkish banking sector – papers.ssrn.com [PDF]
