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Currency Swap

What does Currency Swap mean?

A currency swap exchanges cash flows from fixed income obligations whose denominations are in different currencies. In a currency swap the cash flows are in two different currencies.

Currency swaps look similar to interest rate swaps. But unlike the interest rate swap, the cash flows of both the parties are not in the same currency. While in interest rate swaps only the net interest amount is exchanged by the parties, in currency swap since the cash flows are in different currency they cannot be netted, parties exchange both interest payments.

Futures Knowledge Explains Currency Swap

Companies can also use currency swaps to leverage benefits which it might not be able to get in particular countries. For example, a good Italian company with good credit ratings can issue Euro denominated bonds at good rate in Europe. The company can swap these Euro bonds in to Japanese Yen and get better rates than it could have got by directly issuing a bond in Japan, probably because it is not very popular there and may not have favorable ratings.

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