What is a Currency Swap?

Currency swaps (also known as currency swaps) refer to the exchange of two debt funds with the same amount and the same maturity but different currencies, and also the exchange of currencies with different interest amounts. In simple terms, interest rate swaps are swaps between the same currency debts, while currency swaps are swaps between different currency debts. The two sides of a currency swap are currencies, and their respective claims and debts have not changed. The exchange rate for the initial swap is calculated at the agreed spot exchange rate. The purpose of currency swaps is to reduce funding costs and prevent losses caused by the risk of exchange rate changes. The conditions for currency swaps are the same as those for interest rate swaps, including the existence of quality overweight differences and the opposite willingness to raise funds. In addition, it also includes protection against exchange rate risks.

Currency swap

Can reduce financing costs

Satisfy the wishes of both parties

Avoid

Using currency swaps involves three steps:

The first step is to identify existing cash flows.

Currency swap is a commonly used debt

Swap right comes with a

versus

Currency Swap Synthesis

In 1981, due to the sharp appreciation of the US dollar against the Swiss franc (SF) and the federal German mark (DM), there was a certain exchange difference between the currencies. And negotiate a swap agreement. This is a currency swap performed at a fixed interest rate, and there is no principal exchange at the beginning of the transaction.

The first swap contract appeared in the early 1980s, and since then, the swap market has grown rapidly. This famous swap transaction occurred between the World Bank and International Business Machines Corporation (IBM), which was arranged by Solomon Brothers in August 1981.

The World Bank swaps its $ 290 million fixed-rate debt with IBM's existing Swiss francs and Deutsche mark debt. The main purpose of the swap parties is that the World Bank hopes to raise fixed-rate German Mark and Swiss Franc low-interest-rate funds, but the World Bank cannot raise funds by directly issuing bonds. The most favorable US dollar borrowing rate, the World Bank hopes to raise US dollars in exchange for IBM's German mark and Swiss franc debt; IBM needs to raise a dollar, because the amount is large, it is not appropriate to focus on any capital market, so Using multi-currency funding methods, they used their own advantages to raise the German mark and the Swiss franc, and then exchanged with the World Bank for a preferential interest rate in US dollars.

Currency swap

On October 26, 2018, with the approval of the State Council, the People's Bank of China and the Bank of Japan signed a bilateral currency swap agreement between China and Japan. . ^[1]