Thursday rejected a deal for Detroit to end costly interest-rate swap agreements with two investment banks, potentially eliminating a source definition forex swap agreements cash for the bankrupt city. The following citations come from an interesting blog article entitled Finance As Magic which can be found here . It’s surprising that Finance exists at all. Why do you recommend this news source?
A Swap is a financial agreement by which two parties agree to trade cash flows with one another. The two separate cash flows are known as the legs of the swap agreement. Swaps are generally formed using cash flows based on interest rates or currencies. In the case of interest rate swaps the amount of money exchanged under a swap agreement is determined by what is known as the notional amount. Unlike interest rate swaps, currency swaps do require the exchange of the notional amount. In a currency swap two parties agree to pay the other party a principal amount over a pre-determined time period, however the payments are made in different currencies. Often times currency swaps and interest rate swaps are combined to fit the specific needs of two parties.
Many people confuse currency swaps with cross currency swaps. 2: Currency Swap An FX swap or currency swap agreement is a contract in which both parties agree to exchange one currency for another currency at a spot FX rate. An FX swap agreement is a contract in which both parties agree to exchange one currency for another currency at a spot FX rate. The agreement also stipulates to re-exchange the same amounts at a certain future date also at a swap FX rate.
The contract virtually allows you to utilize the funds you have in one currency to fund obligations denominated in a different currency without incurring foreign exchange risk. An FX swap is a simultaneous purchase and sale of identical amounts of one currency for another with two different value dates normally spot to forward. Swap deals are used for managing currency risks postponing the term of forward-deal and optimizing financing. The most common use of FX Swaps is for institutions to fund their foreign exchange balances. One of the biggest sources of confusion for those new to the FX market is the market convention. We need to make clear the meaning of the following terms in the forex market first.