During the past twenty years, swap contracts have become key financial ‘adapters’ linking
diverse national financial systems to the global financial network. Today banks and investment
companies around the world use swaps extensively to manage their currency, interest-rate, and
equity-market risks and to lower their transaction costs. Yet pension funds, which have grown
rapidly over that same 20-year period, hardly use swaps at all. This paper suggests how pension
funds could use swaps to achieve the risk-sharing benefits of broad international diversification
and hedging while avoiding the ‘flight’ of scarce domestic capital to other countries. The paper
also shows how swaps can be used to lower the risks of expropriation and to lower the other
transaction costs of investing in other countries.