Currency swaps are over-the-counter derivatives, and are similar to interest rate swaps covered already in this volume except that in a cross-currency swap the principal amounts are in different currencies and unlike interest rate swaps, cross-currency swaps can involve the exchange of the principal.
Even where there is no exchange of principal, the counterparties are subject to the foreign exchange rate fluctuation during the substance of the trade.
The tenure of a cross-currency swap typically ranges from one to fifteen years.
Cross-currency swaps are suitable for entities that have a loan commitment denominated in one currency, while the revenues generated by the entity are denominated in a different currency, resulting in a currency mismatch between the currency of the loan and the currency of revenues.
A Cross-currency interest rate swaps allow an entity to switch its loan from one currency to another.
A Cross-currency interest rate swaps enable an entity to manage foreign currency exposures. The entity can use money it receives in one currency to pay off its loans in another currency with a cross-currency swap.
Since a cross-currency swap is basically an interest rate swap, all the risks associated with an interest rate swap in terms of interest rates do exist in this instrument.
The single important reason for entering into a cross-currency swap is to manage foreign exchange exposure. This also becomes a huge risk if not managed properly.
As cross currency swaps ...
With Safari, you learn the way you learn best. Get unlimited access to videos, live online training,
learning paths, books, interactive tutorials, and more.