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EDUCATION: UNDERSTANDING FOREIGN CURRENCY SWAP.

FX:EURUSD   Euro / U.S. Dollar
Hello traders,

If you are a former forex trader, you may know What is Foreign Currency Swap in forex trading. Fortunately, if you are a newbie trader you might wonder what the term refers to, then this post only for you,

FOREIGN CURRENCY SWAP

A currency swap is known as a cross-currency swap, which involves the exchange of one currency for same in another currency. In other words, the foreign currency swap is an agreement between two foreign countries.

DETERIORATING CURRENCY SWAP

The goal of engaging in a currency swap is usually to procure loans in foreign currency at more favourable interest rates than if borrowing directly in a foreign market. The World Bank first introduced currency swaps in 1981 in an effort to obtain German marks and Swiss francs. This type of swap can be done on loans with maturities as long as 10 years. Currency swaps differ from interest rate swaps in that they also involve principal exchanges.

In a currency swap, each party continues to pay interest on the swapped principal amounts throughout the length of the loan. When the swap is over, principal amounts are exchanged once more at a pre-agreed rate (which would avoid transaction risk) or the spot rate.

EXAMPLES OF FOREIGN CURRENCY SWAPS.

For Instance, European company A borrows $120 million from U.S company B; consequently, European Company A lends $100 million to U.S. Company B. The exchange is based on a $1.2 spot rate, the deals allow for borrowing the most favourable rate.

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