I’m not getting the logic of converting foreign cash receipts using swap. My confusion is say a firm has US dollar cash flow of $100 in one year. The swap rates in US is 1% and India is 10% respectively. The current exchange rate is INR 60 / $ . Converting the annual US $ cash flow to Indian Rupee based on the swap would mean:
1st step: Dividing US $ cash flow by US$ interest rate = $100 divided by 1% = $ 10,000 notional principal
2nd step: Using current exchange rate convert US$ notional principal into the corresponding INR notional principal = $10,000 * 60 = INR 6,00,000
3rd step: Using these notional principals for the swaps, the firm will give $100 over the maturity of the swap for INR6,00,000 * 10% = INR 60,000.
This result is absurd, because I cannot possibly expect INR 60,000 in return for $ 100. This is an implied exchange rate of INR 600 / $. This result is absurd. I’m surely missing something vitally important. Please if someone can explain what is going wrong here. Many thanks