Stellar Community Fund

By FX Swap by Hedgehog

FX Swap by Hedgehog

SCF #21

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An efficient and alternative way of foreign currency borrowing or investing.

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Note: Please see the full technical breakdown here: https://drive.google.com/file/d/1bNQ0fvvWQWWsRDAp3SXQ3rW9sJgMGHhN/view

Hedgehog brings Foreign Currency (FX) Swaps to the Soroban ecosystem. FX Swaps can hedge the value of an existing investment against the risk of exchange rate fluctuations, as well as parties benefitting from each others’ access to better loan rates.

This solution: 1. Includes the creation of an Oracle to keep track of the forward rates of various currencies. 2. Acts as a hedging solution for entities wanting to invest or borrow in foreign currency. 3. Is eligible for hedge accounting, as the Far Leg of the FX Swap is an eligible hedging instrument under IFRS 9.

Consider two parties who desire one currency now but want to swap back in the future to the original currency, e.g. One party wants USDC but has EURC, and another party has USDC but wants EURC.

One scenario is when investors can benefit by accessing foreign currency loans at a better rate. USDC holders may be able to take out a EUR loan at a rate of 5%, but they can take out a USD loan at a rate of 3%. EURC holders may be in a similar situation, being able to take out a USD loan at a rate of 5% but an EUR loan at 3%.

By entering into an FX swap agreement, both parties can benefit from the other’s interest rate (the EURC holders get EUR at a better rate, while the USDC holders get USD at a better rate and loan them in return) and swap back the principal at the maturity of the agreement.

The second scenario is to leverage currency swaps to reduce exposure to fluctuations in exchange rates by taking a hedging position. If they suffered a loss due to fluctuating exchange rates affecting their original purpose for operating in a foreign currency, the profit on the swap can offset it.

In TradFi, these agreements are typically done between two parties; by leveraging the power of Soroban and DeFi, Hedgehog can create FX Swaps between pools of investors on both sides so that multiple USDC holders can enter a contract with multiple EURC holders.

An oracle is required because exchanges happen at the spot rate, but the deals are closed at the forward rate. The forward points are the interest rate differential between the two currencies.

Please note Hedgehog will initially operate with well-established and trusted Stablecoins such as USDC, EURC and AUDD.

This is the first of a series of smart contracts to constitute the basis for a hedging financial protocol on Soroban.