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

Finance ManagementBanking & FinanceGrowth & Empowerment

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.

raja
Updated on 18-May-2022 08:16:01

Advertisements