28 Nov
Currency Swaps | CA Final SFM
1. Meaning
Currency Swaps refer to the arrangement where principal and interest payments in one currency is exchanged for such paymentsin another currency.
2. Features
The principal amount for both the Companies are equal or almost equal based on the exchange rate prevailing on the date of starting the swap arrangement.
3. Benefits
This willguard against exchange rate risk for both the enterprises andeliminates uncertainties, for both the parties.
4. Types
Currency Swaps can categorized based on how interest rates are structured
(a) FixedFor Fixed Currency Swap: The interest payments exchanged are payable under Fixed RateBasis for both the contracting parties.
(b) Fixedfor Floating Currency Swap: Interest payments exchanged are payable under Fixed Rate Basisfor party and Floating Rate basis the other party.
(c) Floating for Floating Currency Swap: Interest payments exchanged are payable under Floating Rate Basis for both the parties. However, the base for fixing the floating rates are the same for both the parties, i.e. LIBORor MIBOR etc.
A currency swap allows the two counterparties to swap interest ratecommitments on borrowings in different currencies.
Ineffect a currency swap has two elements:
- An exchange of principal in different currencies, which are swapped back at the original spot rate.
- An exchange of interest rates – the timing of these depends on the individual contract
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