Understanding Forex Currency Pairs

The Swap

When two parties agree to swap principal and interest on a loan made in one currency for a principal and interest payments of a loan of equal value on another currency, such an agreement is known as FX swap or foreign currency swap.

The primary purpose of swap is to acquire debt in a foreign currency at more favorable interest rates than if borrowing directly in a foreign market.

In a currency swap:

  • Each party of the agreement continues paying interest on the swapped principal throughout the loan
  • When finally, the swap agreement is ended, principal amounts are exchanged once more at a pre-agreed rate or the spot rate.

Two main types of currency swaps

Fixed-for-fixed currency swap; exchanging fixed interest payments in one currency for fixed interest payments in another.

Fixed-for-floating; Fixed interest payments in one currency are exchanged for floating interest payments in another.

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