May 02, 2020

Currency Swap and Currency Future

Currency Swap:- A Foreign Currency Swap is an agreement to make a currency exchange between two foreign parties. The agreement Consists of swapping Principal and Interest Payments on a loan made in one currency for principal and Interest payments of loan of equal value in another Currency. The Federal Reserve system offered this type of swap to several developing countries in 2008. The World Bank first introduced Currency swaps in 1981 in an effort to obtain German marks and Swiss francs. This type of swap can be done on loans with maturities as long as 10 years. They differ from interest rates swaps because they also involve principal.                                 Currency Future:- A Currency Future also known as an FX  future or a foreign exchange future, is a futures Contract to exchange one currency for another at a specified date in the future at a price (exchange rate) that is fixed on the purchase date; see foreign exchange derivative. Typically, one of the currencies is the US dollar. The price of a future is then in terms of US dollars per unit of the other currency.   This can be different from the standard way of quoting in the Spot foreign exchange markets.  The trade unit of each Contract in then a Certain amount of other Currency, for instance €125000. Most Contracts have physical delivery, so for those held at the end of the last trading day, actual payments are made in each Currency. However most Contracts are closed out before that. Investors can close out the Contract at any time prior to the Contract's delivery date.

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