Currency Swap

Currency swap

An agreement to swap a series of specified payment obligations denominated in one currency for a series of specified payment obligations denominated in a different currency. Usually fixed for fixed.

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Foreign Exchange Swap

An agreement between two parties to exchange two currencies at a certain exchange rate at a certain time in the future. For example, if a company knows that it will need British pounds in the future and another company knows that it will need U.S. dollars, they agree to swap the two at the agreed-upon exchange rate. This eliminates the risk that the exchange rate will change in a way that is disadvantageous to one party or the other. They are also called currency swaps. See also: Swap.

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Currency swap. In a currency swap, the parties to the contract exchange the principal of two different currencies immediately, so that each party has the use of the different currency. They also make interest payments to each other on the principal during the contract term.

In many cases, one of the parties pays a fixed interest rate and the other pays a floating interest rate, but both could pay fixed or floating rates. When the contract ends, the parties re-exchange the principal amount of the swap.

Originally, currency swaps were used to give each party access to enough foreign currency to make purchases in foreign markets. Increasingly, parties arrange currency swaps as a way to enter new capital markets or to provide predictable revenue streams in another currency.

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Currency Swap

What Does Currency Swap Mean?

A swap that involves the exchange of the principal and interest in one currency for the principal and interest in another currency; it is considered a foreign exchange transaction and is not required by law to be shown on the balance sheet.

Investopedia explains Currency Swap

As an example, suppose a U.S.-based company needs to acquire Swiss francs and a Swiss-based company needs to acquire U.S. dollars. The two companies could arrange to swap currencies by establishing an interest rate, an agreed-upon amount, and a common maturity date for the exchange. Currency swap maturities are negotiable for at least 10 years, making them a very flexible method of foreign exchange. Currency swaps originally were used to get around exchange controls.

Related Terms:
• Currency Forward
• Interest Rate
• Interest Rate Swap
• Spread
• Swap