What is a currency swap?

currency swaps are agreements between two individuals or entities to replace specified types and amounts of currencies. Along with the initial replacement of a specific amount of one currency for a specific amount of another currency, the currency swap process usually also includes a number of recurring payments based on the performance of both currency cash flows. As a result, the swap currency is somewhat distinguished from the currency exchange, because the replacement usually includes simply replacement of the currency for the last exchange rate.

Recurrent payments that make up the second phase of the currency swap usually use solid and variable interest rates. One party agrees to pay a fixed interest rate, while the other party makes interest payments on the basis of a floating exchange rate. However, it is possible to agree on a currency agreement, where both parties apply recurring payments on the basis of a fixed rate or a floating exchange rate. The consistent determination of how the interest rate will be calculated is defined in the contractual terms managed by the Swap.

One of the important aspects of monetary swap, which also distinguishes from monetary exchanges, is the fact that currency exchange is not a permanent part. At a time when both currencies are replaced, the parties coincide with the execution of recurring interest rates for a certain period of time. Once the time is completed in the agreement, both currencies are returned to the original owner. However, each party retains all revenues that have been shared in the form of interest payments.

currency swap transactions are usually used if there are some expectations that these two currencies have the potential to realize a significant amount of return through increased interest rates. As expected, both sides of Usually expect to realize a higher return with the type of currency that is accepted in the swap. Since the exchange rates tend to fluctuate over time, there is usually a reasonable chance that both sides of the currency exchange ultimately benefit.