Currency Swap

A currency swap is a financial agreement between two parties to exchange principal and interest payments in different currencies over a set period. Typically used by corporations or governments, it helps manage exchange rate risk and obtain favorable financing conditions in foreign currencies. For example, a company in the U.S. might swap USD for euros with a European company, agreeing to exchange payments periodically. At the end of the agreement, they reverse the exchange, settling any differences. This process provides access to foreign currency funding and hedges against currency fluctuations.