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Currency Swaps


A currency swap refers the contract between two counterparties which involve the exchange of interest and sometimes of principal in one currency for the same in another currency. Interest payments are exchanged at fixed dates through the life of the contract. There are three variations on the exchange of interest rates, namely fixed rate to fixed rate; floating rate to floating rate; or fixed rate to floating rate.


Currency swaps are effective in terms of reducing the cost of financing, lock-in the exchange rate, hedging interest rate risk, bridging the gap between different financial instruments, expanding funding sources and increasing the effectiveness of asset and liability management. This is mostly used to hedge debt risk and earn profits.

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