Currency swap

on foreign currencies between two parties who agree to exchange elements (call the principal and / or interest payments) of a loan in one currency for equivalent elements of a loan equal in net present value in another currency. So, it is a type of derivative foreign currency. Currency swaps are used pair exploit comparative advantages.

Stfigures

A currency swap is an over the counter derivative, and is closely related to interest rate swaps. However, unlike interest rate swaps, currency swaps may include the exchange of principal.

There are three different ways in which currency swaps can exchange loans:

1.The simplest structure of a currency swap involves exchanging only the principal to the counterparty at the point of the specified future at the rate agreed now. An agreement of this type is developed similarly to a forward contract or a future mode.

2.Another structure for a currency swap can combine the exchange of loan principal, as explained above, with an interest rate swap. In this type of swap, interest cash flows are not "netted" before being paid to the counterparty (as you would in a vanilla interest rate swap) that are denominated in different currencies. As each party effectively borrows in the interest of the other, this type of swap is also known in English as a back-to-back loan.

3.Last but not least, you can swap only the payment of interest cash flows on loans of the same size and term. Again, this being a currency swap, the exchanged cash flows are denominated in different currencies so you are not netted. An example of this type of swap is the exchange of interest payments in dollars at a fixed rate against euro interest payments on variable rate. This type of swap is also known as cross-currency interest rate swap, or cross currenfigures swaps.

Unlike other similar figures

In English this type of swap is sometimes called cross currency swap or currency interest rate swap (CIRS) and must be differentiated from the so-called "FX Swap" or "Forex Swap". In addition, a currency swap must also be distinguished from swap liquidity of a central bank.