Currency Swap

Glossary

Banking

Currency Swap

A currency (or cross-currency, or FX) swap is a standard agreement where two counterparties exchange principals and coupon cash flows in two different currencies. For instance is counterparty A entered into a pay EUR, receive USD cross-currency swap with counterparty B, then the following cash flows would occur: At the start date, counterparty A would pay the USD notional and receive the EUR notional Over the life, Counterparty A would pay EUR coupons and receive USD coupons from counterparty B At the end date, the principal payments are reversed. Counterparty A pays the EUR notional and receives the USD notional from counterparty B Cross-currency swaps are used when issuers raise bond financing in a foreign currency and wish to transform them back into their functional currency. In an FX swap, then coupons are zero and only the two exchanges of principal take place. Cross-currency swaps can be decomposed into two interest rate swaps (in each of the two currencies) and a (cross-currency) basis swap. In a cross-currency basis swap, the fixed coupons are replaced by floating rates (eg SOFR or SONIA), and so are used when an issuer wishes to transform a floating rate liability into a different currency.

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