A currency swap also called cross currency swap is a name given to a foreign exchange agreement between two parties. This agreement is done to exchange principal and fixed rate interest payments on a loan in one currency for principal and fixed rate interest payments on an equal (regarding net present value) loan in another currency. comparative advantage motivate the Currency swaps.
Structure
For a variety of maturities Cross-Currency swaps can be negotiated occassionaly in excess of 10 years.
Unlike interest rate swaps, the exchange of the principal amount is involved in currency swaps. Interest payments are not netted (as they are in interest rate swaps) because these interest payments are denominated in different currencies. Cross-Currency swaps are identical to interest rate swaps, they are over-the-counter derivatives.
