Currency swap

A currency (cross currency swap or currency swap ) is a financial derivative contract in which two parties exchange interest and principal payments in different currencies. A currency swap is similar to an interest rate swap. In this, however, the payments in the same currency to be exchanged. In addition, the notional amounts are exchanged at the currency swap as opposed to the interest rate swap at the beginning and end of the term.

Be distinguished from currency swap is the foreign exchange (FX swap, see there).

A classic application of a currency swap is that two parties originating from borrowing amounts in two different currencies and the payments due during the loan term interest rates (and any amortization amounts) are interchangeable. The emergence of reason here lies in comparative interest benefits that have one or both parties in the currency sought in each of the partner.

Development

Swaps were first used in the early 80s and, in particular for longer protection periods compared to other backup options are often a cheaper alternative dar. 1995 sat swaps Italy for entry into the monetary union. At that time, the suspicion was raised that other countries swaps used to fulfill the Maastricht criteria. Greece followed in 2002 with cross-currency swaps to the apparent cleanup of his household.

Expiration

At the beginning of the term is an Equity Swap at the current spot price at the conclusion of the transaction. Then usually the interest rates during the term be replaced at regular intervals. It pays each contract partner in the currency in which it has received the principal amount. In each of the two currencies fixed or variable interest rates can be paid. At the end of the term of the principal amount exchanged back. This occurs at the same rate as in the principal swap at the beginning of business. So there is in contrast to the forward exchange contract or not Deport Report on the spot rate. The reason for this is that the different interest rates that explain these deviations from the spot rate at the forward contract is already being addressed through the exchange of interest obligations.

Example:

• Currency swap USD against EUR
• Nominal value of EUR 100 million
• Period 3 years
• Upon completion of the USD swap rate for a term of 3 years is 3.5%, the USD is 1.23.

This entails the following payments result in:

• At the beginning of the business pays A to B 100 million EUR and B to A 123 million USD ( principal swap at current exchange rates ).
• During the term of 3 years, A pays to B once a year (ie 1, 2 and 3 years post-trading) 3.5 % on the notional amount of 123 million USD, USD 4.305 million. B pays A quarterly pro rata (Pro rata ) the 3 -month EURIBOR on the notional amount of EUR 100 million. The height of the EURIBOR rate is used, as noted in the last interest payment 3 months ago ( " fixed ") was. So B pays variable interest rates 12 times.
• At maturity after three years, A pays B to 123 million USD and B to A EUR 100 million ( capital redemption at the applicable exchange rate at closing ).

Sometimes a distinction is made between currency swaps and cross-currency swaps. Here are called cross currency swaps are swaps in which both parties a fixed interest rate or both parties a floating rate equal mortgage term (eg, 3 -month EURIBOR against 3-month USD Libor ) pay. In cross-currency swaps pay for this distinction firmly a partner and a variable ( as in the example ), or both variable but with different interest periods ( eg, 6- month EURIBOR against 3-month USD Libor ). Currency swaps, therefore, additionally differ on the parties only the currencies in cross-currency swaps fixed interest periods.

Currency swaps in which both parties pay a variable interest rate equal fixed rate period, are also called basis swaps.

In terms of more than two years provide currency swaps due to a greater market depth ( liquidity) and a lower number of transactions a real alternative to forward currency contracts dar.

Transaction partners

For reasons of legal certainty currency swaps are usually completed under framework agreements. International practice is that of the International Swaps and Derivatives Association (ISDA) in 1992 launched the Master Agreement. In Germany also the German Master Agreement for Financial Derivatives will be used.

Swap transactions come about either through direct negotiation of potential counterparties or through the intermediary of banks as a contractor in the foreign exchange market. Banks play in trade with swaps a significant role, as they can on the one hand to assume the role of mediator and on the other hand, the role of the transaction partner. If the bank is an active partner of the swap transaction, it takes over at their own risk at a position corresponding to a swap transaction and attempts to realize the associated benefits. The bank now occurs as an agent, it is to distinguish between the open and anonymous communication. In the open arrangements, the Bank brings the two partners together for a proposed swap transaction and this then negotiate with each other, the bank may be supportive consulted. The received with this swap transaction risks are borne exclusively by the two parties involved. In the case of anonymous switching the swap partner close their contracts with each of the bank from which then has to wear as an interested party and the risk of default. This credit risk is reduced if necessary and better assessed for the swap partners. An anonymous mediation of a swap is therefore for swap partners especially interesting when there are differences between the creditworthiness of the two players involved in the swap deal.