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Currency Swaps refer to the arrangement where principal and interest payments in one currency is exchanged for such paymentsin anothercurrency.
The principal amount for both the Companies are equal or almost equal based on the exchange rate prevailing on the date ofstartingtheswap arrangement.
This willguardagainst exchangerateriskforboth theenterprises andeliminatesuncertainties,forboth theparties.
Types:
FixedFor Fixed Currency Swap:
The interest payments exchanged are payable under Fixed RateBasisforboth thecontractingparties.
FixedforFloatingCurrencySwap:
Interest payments exchanged are payable under Fixed Rate BasisforpartyandFloatingRatebasistheotherparty.
FloatingforFloatingCurrencySwap:
Interest payments exchanged are payable under Floating Rate Basis for both the parties. However, the base for fixing the floating rates are the same for both the parties, i.e. LIBORor MIBORetc.
A currency swap allows the twocounterparties to swap interest ratecommitmentsonborrowingsindifferentcurrencies.
Ineffectacurrencyswap hastwoelements:
An exchange of principal in different currencies, which are swappedbackattheoriginalspotrate.
An exchange of interest rates – the timing of these depends ontheindividualcontract.
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