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Currency Swap

A currency swap is a financial agreement between two parties to exchange principal and interest payments in one currency for equivalent amounts in another currency over a specified period. Currency swaps are used by companies and governments to manage exchange rate risk, secure better interest rates, or hedge against currency fluctuations. The two parties agree on the terms of the swap, including the exchange rate and interest rate differentials.

Example

A U.S. company and a European company enter into a currency swap where the U.S. company pays in euros and the European company pays in U.S. dollars, allowing both parties to hedge against exchange rate risk.

Key points

• A currency swap is an agreement to exchange principal and interest payments in different currencies.

• It is used to manage exchange rate risk and hedge against currency fluctuations.

• Swaps allow parties to secure better interest rates or access foreign currency funding.

Quick Answers to Curious Questions

Companies use currency swaps to hedge against exchange rate risk, secure better interest rates, and access foreign currency funding for international operations.

Two parties exchange principal and interest payments in different currencies based on an agreed-upon exchange rate and interest rate differentials.

A U.S. company and a European company swap U.S. dollars for euros to hedge against exchange rate fluctuations and manage foreign currency exposure.