BIZCHINA / Finance/Investment |
Currency swap(chinadaily.com.cn)Updated: 2006-10-18 10:40 A currency swap means an arrangement in which two parties exchange specific amounts of different currencies initially, and a series of interest payments on the initial cash flows are exchanged. Often, one party will pay a fixed interest rate, while another will pay a floating exchange rate (though there may also be fixed-fixed and floating-floating arrangements). At the maturity of the swap, the principal amounts are exchanged back. Unlike an interest rate swap, the principal and interest are both exchanged in full in a currency swap. An interest rate swap is a contract to exchange cash flow streams that might be associated with some fixed income obligations, say swapping the cash flows of a fixed rate loan for those of a floating rate loan. A currency swap is exactly the same thing except, with an interest rate swap, the cash flow streams are in the same currency. With a currency swap, they are in different currencies. That difference has a practical consequence. With an interest rate swap, cash
flows occurring on concurrent dates are netted. With a currency swap, the cash
flows are in different currencies, so they can't net. Full principal and
interest payments are exchanged without any form of
netting. (For more biz stories, please visit Industry Updates) |
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