Currency swap

A currency swap is a spot transaction on the over-the-counter market that is executed at the same time as a forward transaction, with currencies being exchanged at both the spot date and the forward date. One currency is bought at the spot rate and date, while the transaction is reversed at the forward date and rate. Thus, once the swap expires, both parties return to their original positions. The currency swap acts as an investment in one currency and a loan in the other.

There is an interest rate differential over the period of the swap, which is paid between the two parties.

The currency swap is useful when a company forecasts a short-term liquidity shortfall in a specific currency, and has sufficient funds in a different currency to effect a swap into the currency where the funds are needed.

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