Currency Swap
A currency swap is a foreign-exchange agreement between two institutions to exchange aspects (namely the principal and/or interest payments) of a loan in one currency for equivalent aspects of an equal in net present value loan in another currency.
Currency swaps are over-the-counter derivatives, and are closely related to interest rate swaps. However, unlike interest rate swaps, currency swaps can involve the exchange of the principal.
the main uses of Currency Swap
Currency swaps have two key uses:
- To secure cheaper debt (by borrowing at the best available rate regardless of currency and then swapping for debt in desired currency using a back-to-back-loan).
- To hedge against (reduce exposure to) exchange rate fluctuations.
central banks are currently participating in the Currency Swap Line arrangements –
There are currently 6 central banks participating in this Currency Swap Line arrangements. The 6 central banks are:-
- The Bank of Japan
- US Federal Reserve
- The European Central Bank
- The Bank of England
- The Central Bank of Canada
- The Central Bank of Switzerland
India During the fall of rupee against world currencies in 2013, initiated many agreements with many world countries over currency swap, which helped us to stable the rupee.
