What are Currency Swaps?


0

In a currency swap, the two payment streams being exchanged are denominated in two different currencies. Usually, an exchange of principal amount at the beginning and a re-exchange at termination are also a feature of a currency swap.

A typical fixed-to-fixed currency swaps work as follows. One party raises a fixed rate liability in currency X say US dollars while the other raises fixed rate funding in currency Y say DEM. The principal amounts are equivalent at the current market rate of exchange. At the initiation of the swap contract, the principal amounts are exchanged with the first party getting DEM and the second party getting dollars. Subsequently, the first party makes periodic DEM payments to the second, computed as interest at a fixed rate on the DEM principal while it receives from the second party payment in dollars again computed as interest on the dollar principal.  At maturity, the dollar and DEM principals are re-exchanged.

A floating-to-floating currency swap will have both payments at floating rate but in different currencies. Contracts without the exchange and re-exchange do exist. In most cases, an intermediary- a swap bank- structures the deal and routes the payments from one party to another.

A fixed-to-floating currency swap is a combination of a fixed-to-fixed currency swaps and a fixed-to-floating interest rate swap. Here, one payment stream is at a fixed rate in currency X while the other is at a floating rate in currency Y.


Like it? Share with your friends!

0
BMS Team

We, at BMS.co.in, believe in sharing knowledge and giving quality information to our BMS students. We are here to provide and update you with every details required by you BMSites! If you want to join us, please mail to [email protected].

0 Comments


Warning: Undefined array key "html5" in /home/bmsnewco/public_html/wp-content/plugins/facebook-comments-plugin/class-frontend.php on line 140

Facebook comments:

This Website Is For Sale. Email us an offer we cannot refuse on [email protected] :)

X
Choose A Format
Personality quiz
Series of questions that intends to reveal something about the personality
Trivia quiz
Series of questions with right and wrong answers that intends to check knowledge
Poll
Voting to make decisions or determine opinions
Story
Formatted Text with Embeds and Visuals
List
The Classic Internet Listicles
Countdown
The Classic Internet Countdowns
Open List
Submit your own item and vote up for the best submission
Ranked List
Upvote or downvote to decide the best list item
Meme
Upload your own images to make custom memes
Video
Youtube and Vimeo Embeds
Audio
Soundcloud or Mixcloud Embeds
Image
Photo or GIF
Gif
GIF format