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FOLLOWING NEWS
RANGE TRADING
TREND TRADING
SCALPING
COMMODITY FUTURES
LEVERAGE
CURRENCY BAND
EXCHANGE RATES
FLOATING EXCHANGE RATE
FIXED EXCHANGE RATE
LINKED EXCHANGE RATE
CURRENCY SWAP
LIQUIDITY
MARKET SPECULATORS
CURRENCY SWAP
A currency swap (or cross currency swap)
is a foreign exchange agreement between two parties 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. Currency swaps are motivated by comparative advantage.
Currency swaps
can be negotiated for a variety of maturities of up to 10 years.
Unlike a
back-to-back loan, a currency swap is not considered to be a loan by United
States accounting laws and thus it is not reflected on a company's balance
sheet. A swap is considered to be a foreign exchange transaction (short leg)
plus an obligation to close the swap (far leg) being a forward contract.
Unlike
interest rate swaps, currency swaps involve the exchange of the principal
amount. Interest payments are not netted (as they are in interest rate swaps)
because they are denominated in different currencies. Further, many currency
swaps are traded on organized exchanges - lowering counter-party risk, as
evidenced by the bid-ask spread on most listings.
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