There are 2 legs in a FX swap transaction. Currency swaps present a competitive advantage to the parties involved as these parties can now borrow foreign currency at a lower cost with less exposure to foreign exchange rate risk.įX swap is a contract between two parties that simultaneously agrees to buy (or sell) a specific amount of a currency at an agreed on rate, and to sell (or buy) the same amount of currency at a later date at an agreed on rate. In order for such an exchange to take place successfully, an interest rate (fixed or floating), agreed upon the amount of borrowing, and a maturity date must be set. In this situation, the US firm will borrow pounds, and the UK firm will borrow dollars the US firm will pay for the UK firm’s debt that is in USD (Principal and interest payments made in USD) and UK firm will pay for US firm’s debt that is in pounds (principal and interest payments made in pounds). The payments that are exchanged are interest and principal payments of a loan denominated in one currency for a loan of an equal amount of another currency.Īs an example, a US based firm needs British Pounds and a company based in the UK requires US dollars. A typical currency swap constitutes a foreign exchange agreement where two parties will exchange or ‘swap’ a series of payments in one currency for a series of payments in another currency. The article offers clear examples and explanations of each and highlights how they are similar and different to each other.Ī currency swap is an agreement between two parties to exchange specific amounts of different currencies.

Currency swaps and FX swaps are similar to one another, and are, therefore, easily confused to be the same. The article takes a closer look at two types of swaps that are used for swapping foreign currency through minimizing foreign exchange rate risk. Swaps are derivatives that are used for swapping cash flow streams and are used in most instances for hedging purposes.

Fra swap difference