Circus Swap

Circus swap definition

One of the most common forms of FOREX transactions, the circus swap is a specialized type of currency coupon swap wherein one party trades a fixed-rate loan in one currency to the second party for a comparable floating rate loan in a different currency. The name “circus swap” is an acronym for Combined Interest Rate and Currency Swap, since both the type of interest and the currency are exchanged in these versatile transactions. Circus swaps most commonly involve floating rate loans that are based upon LIBOR, since it is one of the most commonly-used economic indicators to which interest rates are tied in the international FOREX market. Circus swaps are sometimes simply called cross-currency swaps or currency coupon swaps.

Circus swap example

A typical circus swap transactions involves two companies in different companies and a bank that serves as a mediator. Since companies typically have an advantage in obtaining loans at favorable rates within their home countries, most circus swap loans start with Company A obtaining a floating rate loan at the most favorable rate possible, and then paying the bank an additional percentage point for facilitating the loan process. Meanwhile, Company B obtains a similar fixed-rate loan in its own country, and pays the percentage point to the bank for its services. By exchanging these loans, Company B can acquire currency in the country of Company A at a more favorable floating rate than Company B could achieve on its own; likewise, Company A gains a position in the native currency of Company B at a more favorable fixed rate than it could otherwise have obtained. The bank profits by its one percent interest in the transaction, so everyone benefits in this scenario.
Tim Ord
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