Description:-
In currency swap involves exchanging principal and fixed interest payments on a loan in one currency for principal and fixed interest payments on a similar loan in another currency. Unlike an interest rate swap, the parties to a currency swap will exchange principal amounts at the beginning and end of the swap. The two specified principal amounts are set so as to be approximately equal to one another, given the exchange rate at the time the swap is initiated.
Why are they traded?
A bank pays floating rate of interest on deposits (assets) and earns a fixed rate of interest on loans. The bank could use a fixed-pay swap (pay a fixed rate and receive a floating rate) to convert its fixed-rate loans into floating-rate assets.
Some companies have a comparative advantage in acquiring certain types of financing. For example, consider a well-known U.S. firm that wants to expand its operations into Europe, where it is less known. It will likely receive more favourable financing terms in the U.S. By then using a currency swap, the firm ends with the euros it needs to fund its expansion.
Life cycle events: –
No upfront fees. Termination fees applicable on early terminations.
Interest amounts (Fixed and floating) are exchanged depending on the frequency agreed on the trade.(e.g. daily, weekly, monthly, quarterly, yearly).
OTCWIRE 