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About Currency Swap
  • Currency Swap operation, also known as a cross currency swap, is an off-balance sheet transection in which the parties involved agree under contract to exchange the principal amount of a loan in one currency and the interest applicable on it during a specified period of time for a corresponding amount and applicable interest in a second currency.
  • By means of currency swap, the counterparties can hedge their exchange rate and interest rate risk and also reduce the cost of funding.
  • In a typical currency swap transaction, the first party borrows a specified amount of foreign currency from the counterparty at the foreign exchange rate in effect. At the same time, it lends a corresponding amount to the counterparty in the currency that it holds
  • For the duration of the contract, each participant pays interest to the other in the currency of the principal that it received.
  • Upon the expiration of the contract at a later date, both parties make repayment of the principal to one another.
  • Currency swaps are often used to exchange fixed-interest rate payments on debt for floating-rate payments; that is, debt in which payments can vary with the upward or downward movement of interest rates. However, they can also be used for fixed rate-for-fixed rate and floating rate-for-floating rate transactions.
  • The benefits for a participant in such an operation may include obtaining financing at a lower interest rate than available in the local market, and locking in a predetermined exchange rate for servicing a debt obligation in a foreign currency.
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