What does Circus Swap mean?
A type of currency swap which combines swaps for both currency and interest rate. In fact the term "CIRCUS" has been formed by deriving some alphabets from the words ‘Combined Interest Rate and Currency Swap’. A fixed-rate loan in one currency is swapped with a loan in another currency with a floating interest rate. The floating rate in a circus swap is almost always tied to the London Interbank Offer Rate (LIBOR).
Circus swaps can also be reffered to as cross-currency swaps.
Futures Knowledge Explains Circus Swap
The Circus Swap combines the features of both a currency swap and an interest swap. This swap can be used for currency pairs which do not have an active swap market, or also by companies that look to protect themselves from a rising rate environment along with an expected change currency rates.
For example, Company ABC can get a loan in the currency Company DEF at a better floating rate than they would be able to achieve on their own. Similarly, Company DEF gets a position in the home currency of Company ABC at a more favorable fixed rate than it could otherwise have negotiated. It's a win-win, and the banks usually charge a 1% commission to facilitate this type of swap.