What does currency swap mean?

Currency swap (also known as currency swap) refers to the exchange of two debt funds with the same amount, same term, but different currencies, and also involves currency exchange with different interest amounts. Simply put, interest rate swaps are swaps between debts of the same currency, while currency swaps are swaps between debts of different currencies. The currency swap between the two parties is currency, and their respective debt and debt relationships have not changed. The exchange rate for the initial swap is calculated at the agreed spot exchange rate. The purpose of currency swaps is to reduce financing costs and prevent losses caused by exchange rate fluctuations. The conditions of currency swaps are the same as those of interest rate swaps, including the existence of quality overweight differences and opposite financing intentions. In addition, they also include the prevention of foreign exchange risk.

For example, suppose there are two people, A and B, with A's relatives selling pork and B's relatives selling beef. A will buy pork at a cheaper price at a relative's house, and B will do the same. So both A and B buy meat at their relatives' homes. One day, both A and B suddenly wanted to change their tastes. A wanted to eat beef, and B wanted to eat pork. We assume that the market price of pork and beef is 20 jin, the cost price is 10 jin, and the relative price is 15 jin. So, both A and B took 20 yuan each, prepared to buy a pound of meat, and set off. They happened to meet on the road. As soon as the two of them got together, they went to their relatives' houses to buy meat and exchanged the meat. During this process, both A and B saved 5 yuan each. A currency swap means financing through their respective advantageous channels and then completing the exchange.

A currency swap refers to the exchange of currencies between different countries or regions. The advantages of currency swaps (also known as currency swap)  include the following aspects:

1. can reduce financing costs.

2. Satisfy the wishes of both parties.

3. Foreign exchange risk is avoided because the exchange rate is fixed through forward contracts. The disadvantage of this swap, like interest rate swaps, is that there is also a risk of default or non-performance of the contract. If this is the case, the other party will inevitably suffer losses due to changes in interest rates and exchange rates.

It should be noted that currency swaps and interest rate swaps can be carried out separately and can also be combined simultaneously. But the operating principle is the same as the individual interchangeability mentioned above.

In addition to the two major forms of interest rate swaps and currency swaps mentioned above, there are also many other forms of swap transactions, and here are three types introduced.

(1) Parallel loan

(2) Back-to-back loan

(3) Medium- and long-term foreign exchange contracts