Currency Swap

A currency swap is a financial arrangement between two parties, typically banks or multinational corporations, to exchange a specific amount of one currency for an equivalent amount of another currency. The purpose of a currency swap is to mitigate foreign exchange rate risks and facilitate international transactions. The parties involved agree on the exchange rate, principal amounts, and the duration of the swap. At the inception of the swap, the parties exchange principal amounts in their respective currencies and agree to reverse the transaction at a future date. Currency swaps are commonly used to manage cash flows, reduce exposure to exchange rate fluctuations, and access foreign capital markets.