Currency Swap

The speaker provides a detailed overview of a currency swap.  A currency swap is created when two counterparties, who have issued two securities denominated in different currencies, exchange the principal at the outset of the swap.  This exchange is primarily governed by the exchange rate.  At some predefined interval afterwards, the counterparties will exchange interest payments based on the currency interest rate.  At the end of the swap agreement, the counterparties will return the principal back to the other counterparty. 

What is a Currency Swap?

A currency swap is an agreement between two parties to exchange a currency after a specified period of time. Maturities for currency swaps can go up to 30 years in the future. In most currency swap agreements, one party will pay a fixed interest rate, while another will pay a floating exchange rate. Currency swap maturities are negotiable for 10 years, making it one of the most flexible forms of currency exchange. Currency swaps are similar to interest rate swap, except the cash flows are in different currencies, so they can’t net. Instead, full principle and interest rate payments are exchanged without any form of netting.