PPT Slide
Instead of buying 10-year US Treasury notes yielding 8.14%, the
investor purchased 10-year German government bonds yielding
8.45% (denominated and payable in deutshemarks), and
simultaneously entered into a currency swap.
1. Default risk of the swap counterparty;
2. Over the 10-year life, the investor might have desired to
liquidate the investment early and sell the German bonds prior
to the maturity of the swap (left with a swap for which it had
no obvious use as a hedging instrument).
Risks (besides the default risk of the German government)