Swap has different forms and currency swap is one of them. The currency swap is mainly used to control the currency exchange rates and in this way it can also be termed as an instrument of hedging. It is also known as foreign exchange dealing. At the same time, there is no need or obligation to put these transactions of foreign currency or currency swap on the balance sheets because according to the accounting laws of United States of America, currency swap is totally different from a loan.
Currency swap has been designed as an instrument of foreign currency interchange for a limited span of time. Two parties remain involved in this agreement and according to this contract both these parties provide a definite amount of currency to each other.After the specified time limit the original amount is returned back by both of them to each other.In a currency swap the cash flow streams are in currencies of different countries. Again, in this kind of swap no form of netting exists and exchange of total amount of principal money as well as the interest rates are done here.
Now, if any Indian company is in need of Chinese yuan renminbi and at the same time, there is a Chinese company that needs Indian rupee for some purpose then these two companies can come in contact with each other and can sign an agreement that would remain valid for a limited period. At the same time, the interest rate and the amount of exchange should also be there in the agreement.
In the last few decades, the international market has developed to a large extent and many companies have been involved in businesses that are spread in several countries. At the same time, cross border investments are also encouraged by the governments and because of all these, the financial market of the world is growing at a rapid pace.
At the same time, companies need foreign currency of that country in which it is operating or investing. On the other hand, there are also risks that are related to these activities because the value of currency of a particular country can fluctuate at any time and this might cause huge losses. The currency swaps can be used as a tool to prevent risks related to the exchange of activities. At the same time, it can also be used as a source of foreign currency that is necessary for every kind of business activity on the foreign land.
Last Updated on : 1st July 2013