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Currency Swap Examples

>> July 2, 2011

Currency Swap is an agreement between two parties of two countries for exchanging of principle and interest of loan at its present value. This swap is very useful for controlling foreign exchange risk. Interest rate swap is different from currency swap, because in interest rate swap, we just exchange the interest from fixed to floating rates but in currency swap, we both principle and interest of loan is exchanged from one party to another party for mutual benefits.

Now. We are explaining currency swap examples :

1st Example of Currency Swap

Company A is doing business in USA and it has issued bond of $ 20 Million to  bondholders that has been nominated in US $. Other company B is doing business in Europe. It has issued bond of  $ 10 Million Euros. Now, both company's directors sit in one room and agreed for exchanging the principle and interest of both bonds. Company A will get $ 10 million Euros Bonds with  its interest payment and Company B will get $ 20 million bond for exchanging his principle and interest. This is the simple example of currency swap.

2nd Example of Currency Swap

Federal Reserve bank of USA exchanged his taken debt with foreign country and its value is 0.06 Billion Dollars. Now getting money will be asset in the form of central bank liquidity swaps.

3rd Example of Currency Swap

 Suppose one USA company wants to start his factory in India. For this it gets $10 billion dollar in the form of loan from USA market and Exchanges this amount from India company B. Now company A has Indian currency for doing business in India and company B which is Indian company has USA currency and it can  get Forex earning. It means that both are benefited with single deal of currency swap.

4th Example of Currency Swap 

An agreement to pay 1% on a Japanese Yen principal of ¥1,040,000,000 and receive 5% on a US dollar principal of $10,000,000 every year for 3 years.

5th Example of Currency Swap 

Currency Swap is very useful for multinational companies who have many branches in different countries. Suppose, A company's head office in UK and it is doing business in USA. A company has 1,00,000 pounds in bank which it got from public loan for doing business. But UK's one branch in USA which needs 50,000 USA dollars for 2 months because we can do business in USA with dollars not with pounds. Now, with the help of currency swap, UK company can use his 100000 pounds for covering the need of 50,000 $ of  USA branch. Currency swap allows you to get any foreign currency with the exchange of own currency on the basis of exchange rate on any future date without  taking foreign exchange risk. Again same currency buy back by currency buy back swap. Company of UK did same and with the help of Financial Intermediary, it get 50,000$ for its USA branch for 2 months.

Related : Credit Default Swap

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chiku September 6, 2013 at 5:46 AM  

sir nice comments i want to know TOM currency and SPOT currency.

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