Meaning

Currency swaps are financial

CURRENCY SWAPS
agreements between two parties to
exchange principal and interest
payments in different currencies..
Facilitate efficient management of
currency exposure and reduce risks
associated with fluctuating exchange
rates.
Key Features:
• Involves two currencies and two
notional amounts.
• Parties agree to exchange cash
flows periodically.
• Typically, a fixed-for-floating or
floating-for-floating rate
exchange.
Benefits:
• Mitigates currency risk.
• Allows access to favorable
interest rates in different
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markets.
BIPASHA SACHDEVA
• Enhances financial flexibility for
multinational corporations.
FLOWCHART MECHANICS

Mechanics:
•Parties agree on the notional amounts,
currencies, and exchange rates.
•Interest payments are exchanged based
on the agreed-upon terms.
•Principal amounts are exchanged at the
beginning and end of the swap period.

1.Example: Fixed-for-Floating Rate Swap

1. Scenario:
1. Party A (USD) and Party B
(EUR).
2. Party A pays fixed
interest in USD.
3. Party B pays floating
interest in EUR.
2. Steps:
1. Parties agree on a
notional amount (e.g., $1
million USD and €90
thousand EUR).
2. Fixed interest rate
agreed at 5% for USD,
floating rate linked to
EURIBOR for EUR.
3. Regular interest
payments exchanged,
e.g., semi-annually.
4. Principal amounts
swapped at the
beginning and end of the
swap.

Conclusion:
Currency swaps provide a
flexible tool for managing currency
risk and optimizing financial
strategies in a globalized market.
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