What are Currency Swaps?

Currency swaps are exchange of different currencies for a period of time. After the period of time, the swap maturity, the exchange is reversed. Currency swaps are performed by companies of same or different nation(s) to improve their efficiency by dealing with suitable currency. According to national rules, currency swaps are not considered as loans and thus not to be included in company balance sheets.

The maturity period of currency swaps are usually more than 5 years. As the swap includes different currencies, companies pay a series of interests, usually in every 6 months, on the initial cash flows. According to the type of interest rate the currency swaps can be grouped in to 3 as,

1. Fixed-floating exchange rate – interest rate for one currency is fixed and the other changes with the increase of decrease in exchange rate. This is the most followed currency swap.
2. Floating-floating – interest rate of both currencies changes with exchange rate changes.
3. Fixed-fixed – interest rate of both currencies are fixed irrespective of exchange rate changes.

Currency swaps provided companies more flexibility in managing their capital by dealing with multiple currencies, burrowing from banks with low interest rates, issuing bonds to foreign customers, etc. The successful implementation of currency swaps depends on many things like the effective company management, the transaction costs and the settlement risks.

NobleTrading.com Features Online Stock Trading, Online Options Trading Online Futures Trading, Online Forex Trading Worldwide Brokerage Service, Day Trading Brokerage