Definition
Currency swaps involve exchanging both principal amounts (at inception and maturity) and periodic interest payments in two different currencies. They differ from FX forwards because principal is exchanged and interest payments occur throughout the swap's life. Multinational corporations use currency swaps to hedge long-term foreign currency borrowing.
lightbulb Example
A U.S. company borrows ¥10B (5-year, 1.5%) and a Japanese company borrows $100M (5-year, 4%). They swap: the U.S. company pays yen interest and receives dollar interest, gaining cheaper access to yen funding.
verified_user Key Points
- Principal amounts exchanged at start and end
- Interest payments exchanged periodically
- Different from FX forward (which only exchanges principal)
- Used to access cheaper foreign currency funding