Currency swaps can be defined as a legal agreement between two or more parties to exchange interest obligation or interest receipts between two different currencies.
It involves three steps:
• Initial exchange of principal between the counter parties at an agreed upon rate of exchange which is usually based on spot exchange rate.
This exchange is optional and its sole objective is to establish the quantum of the respective principal amounts for the purpose for calculating the ongoing payments of interest and to establish the principal amount to be re-exchanged at the maturity of the swap.
• Ongoing exchange of interest at the rates agreed upon at the outset of the transaction.
• Re-exchange of principal amount on maturity at the initial rate of exchange.
This straight forward, three step process results in the effective transformation of the debt raised in one currency into a fully hedged liability in other currency.
It involves three steps:
• Initial exchange of principal between the counter parties at an agreed upon rate of exchange which is usually based on spot exchange rate.
This exchange is optional and its sole objective is to establish the quantum of the respective principal amounts for the purpose for calculating the ongoing payments of interest and to establish the principal amount to be re-exchanged at the maturity of the swap.
• Ongoing exchange of interest at the rates agreed upon at the outset of the transaction.
• Re-exchange of principal amount on maturity at the initial rate of exchange.
This straight forward, three step process results in the effective transformation of the debt raised in one currency into a fully hedged liability in other currency.