Currency swaps  

A Currency swap is a specific type of forex derivative. A currency swap is an accord agreed upon by two parties to buy or sell currency at spot rates, which will return to a specific price (the forward rate) at the end of a predetermined period. The forward rate can be figured out from the spot rate, forward points (the premium of the spot rate derived from the discrepancy in interest rate between the currencies) and period of the deal in days.

In currency swaps, the holder of an a currency to be traded changes that currency for an equal amount of a different currency to obtain bank financing at a lower rate or to better the market liquidity of a currency owned. For example, a perfect opportunity for a currency swap would occur if company A managed to acquire a five-year below market financing from a German bank, and thus changes deutschmarks for U.S dollars with company B, who has an excess of U.S. Dollars. Once maturity occurs the swap is returned. A cross-currency exchange utilizes a fixed rate obligation for one currency and a floating rate obligation in the other. Swaps can be thought of as mutually advantageous accords. They do not however appear on the balance sheet unlike bank loans.

Currency swaps can be agreed upon for a variety of maturity periods lasting up to 10 years. A currency swap is not considered to be a loan by United States accounting laws and thus unlike a back to back loan it does not need to appear on a company's balance sheet. Rather a swap is considered by United States accounting laws to be a foreign exchange transaction (short leg) in addition to an obligation to close the swap (far leg) similar to a forward contract.

Currency swaps are frequently combined into one deal with interest rate swaps. For example, a company could look to exchange cash flow for their fixed rate debt in US dollars for a floating-rate debt in Euro. This happens frequently in Europe where companies browse around for the least expensive debt in any denomination they can find and then seek to change it for debt in the currency is wants.

Interest Rate swaps are financial interest rate contracts where both the buyer and seller change interest rate exposure over the entire term of the agreement. The most frequent exchange contract is the fixed-to-float swap which occurs when the seller obtains a fixed rate from the buyer and the buyer obtains a floating rate from the seller. Two other types of exchange are fixed-to-fixed swap and float-to-float swap. Interest rate changes are used more frequently by commercials to re-allocate exposure to interest rate risk.