What is the concept of currency swaps (FX swaps)?

Currency swap is an agreement between the parties to exchange principal amounts of different currencies at a predetermined rate on a future date.

Types

The two types of currency swaps are as follows −

• Fixed to fixed − Exchange of fixed interest payments in one currency on loan equivalent in other currency.

• Fixed to floating − Fixed rate obligations in one currency are exchanged for floating rate obligations in other currency.

Stages

The stages included in the currency swaps are as follows −

• Foreign exchange market is spotted.

• Exchanging of interest payments during swap term is carried out.

• On maturity principle is re-exchanged.

Principal is usually exchanged in any of the below ways −

• At the start.

• At the end.

• In between starting and ending.

• Neither at starting and nor at ending.

Benefits

The benefits of currency swaps are mentioned below −

• Company raises funds in one currency and saves in another currency.

• Can switch their loans between currencies.

• Flexibility in risk hedge.

• Companies can undo their faulty decisions.

• Can lock exchange rates for longer periods.

• Can restructure company liabilities.

• Raise funds at less cost.

• Degree of liquidity is high.

• Early termination depends on agreement between parties.

• Used to hedge.

• Currency swaps can be done at any time of transaction life.