Currency Swap

A currency swap is a financial derivative in which two parties agree to exchange the principal amounts of two currencies at an agreed exchange rate at the outset, and then re-exchange the principal amounts at another agreed exchange rate at maturity. It is commonly used by enterprises to adjust the maturity structure of foreign exchange funds, hedge exchange rate risks, or reduce financing costs. Typical scenarios include: an exporter receives US dollars and needs to convert them into RMB for use, but will later need US dollars to pay for imported goods; a swap can lock in the exchange rate and avoid the spread loss of two spot transactions. Points to note: swap points/spreads, counterparty credit risk, and hedge accounting recognition. Unlike a spot foreign exchange transaction, a swap involves two opposite transactions with different settlement dates; unlike a foreign exchange forward, a swap includes an exchange of principal, whereas a forward usually only settles the difference. In addition, a cross-currency swap overlaps with a currency swap, but the former focuses more on interest exchange for long-term debt.