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How a currency swap works?
Posted: 01 Nov 2023 06:54 UTC  Post #12
BilliJean2039
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Posted: 12 Nov 2023 15:58 UTC  Post #13
gipila
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Posted: 28 Nov 2023 01:52 UTC  Post #14
Finan
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A currency swap is an agreement between two parties to exchange principal and interest payments in different currencies. Swaps are often used to hedge against currency risk or to obtain a lower interest rate in a foreign currency.

There are two main types of currency swaps:

Plain Vanilla swaps: These are the most basic type of swap and involve the exchange of principal and interest payments in two different currencies.
Basis swaps: These swaps are more complex and involve the exchange of principal and interest payments in two different currencies, as well as a fixed or floating basis rate.
Here is an example of how a plain vanilla currency swap works:

Company A is a US-based company that borrows €10 million from a German bank.
Company B is a German-based company that borrows $10 million from a US bank.
Company A and Company B agree to enter into a currency swap.**
Under the terms of the swap, Company A will pay Company B €10 million in exchange for $10 million.
Company A will then make annual interest payments to Company B in euros at a fixed rate of 5%.
Company B will make annual interest payments to Company A in dollars at a fixed rate of 4%.
Currency swaps can be beneficial for several reasons:

They can help to hedge against currency risk. For example, if Company A is concerned that the euro will depreciate against the dollar, it can enter into a currency swap with a US company to lock in a fixed exchange rate.
They can help to obtain a lower interest rate in a foreign currency. For example, if Company B can borrow dollars at a lower interest rate than euros, it can enter into a currency swap with a US company to effectively borrow euros at a lower rate.
However, currency swaps can also be risky:

They can expose the parties to credit risk. If one of the parties defaults on its obligations under the swap, the other party could lose a significant amount of money.
They can be complex and difficult to understand. Companies that are considering entering into a currency swap should carefully consider the risks and consult with a financial advisor.
Currency swaps are a valuable tool for managing currency risk and obtaining lower interest rates in foreign currencies. However, they are complex instruments and companies should carefully consider the risks before entering into a swap.

Best Regards,
Tim David
Last edited: 28 Nov 2023 06:54 UTC by Finan
Posted: 30 Nov 2023 05:04 UTC  Post #15
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Posted: 30 Nov 2023 06:19 UTC  Post #16
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Posted: 02 Dec 2023 06:50 UTC  Post #17
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