Currency swap

Guided By:- Presented By:-

Mr. Rajesh Shobhit Maurya
Faculty of IBM Sneha Jha
CSJM University Abha Gautam

Kanpur MBA (FT) 4th Sem.

CSJM University
kanpur
3 Introduction

Acurrency swap(or a
crosscurrency swap) is a foreign
exchange derivative between two
institutions to exchange the
principal and/or interest payments
of a loan in onecurrencyfor
equivalent amounts, in net present
value terms, in anothercurrency.
4 Concept of Currency
Swap
The first formal currency swap, as opposed to the then
used parallel loans structure, was transacted by
Citicorp International Bank for a $US100,000,000 10
year US Dollar Sterling swap between Mobil Oil
Corporation and General Electric Corporation Ltd
(UK). The concept of the interest rate swap was
developed by the Citicorp International Swap unit
but cross-currency interest rate swaps were
introduced by theWorld Bankin 1981 to obtain
Swiss francs and German marks by exchanging
cash flows withIBM. This deal was brokered by
Salomon Brotherswith a notional amount of $210
million and a term of over ten years
5 Types of Currency Swap

Swaps are generally of the

following types:
1. Interest Rate Swap:
2.Currency Swap
3.Basis Swaps
6 Interest Rate Swap

Where cash flows at a fixed rate of interest are

exchanged for those referenced to a floating
rate. An interest rate swap is a contractual
agreement to exchange a series of cash
flows. One leg of cash flow is based on a
fixed interest rate and the other leg is based
on a floating interest rate over a period of
time.
There is no exchange of principal. The size of
the swap is referred to as the notional
amount and is the basis for calculating the
cash flows.
7 Currency Swap:
Where cash flows in one currency are
exchanged for cash flows in another currency.
A currency swap is contractually similar to an
interest rate swap.
The main differences are:
i. Each interest rate is in a different currency,
ii. The notional amount is now replaced by two
principal amounts one in each currency, and
iii. These principal amounts are typically
exchanged at the start of the swap and then
re-exchanged at maturity.
8 Basis Swaps

Where cash flows on both the legs of the swap

are referenced to different floating rates A
Basis swap could be an Interest Rate Swap or
a currency swap where both legs are based on
a floating rate.
A basis swap involves a regular exchange of
cash flows, both of which are based on
floating interest rates. Most swaps are based
on payment of a fixed rate against a floating
rate, say, LIBOR. In the basis swap both legs
are calculated on floating rates.
9 Growth of Currency
Swap
As the International Finance in Practice box suggests, the
market for currency swaps developed first. Today,
however, the interest rate swap market is larger. Size is
measured bynotional principal, a reference amount of
principal for determining interest payments. The exhibit
indicates that both markets have grown significantly since
2000, but that the growth in interest rate swap has been
by far more dramatic. The total amount of interest rate
swaps outstanding increased from $48,768 billion at year-
end 2000 to $349.2 trillion by year-end 2009, an increase
of 616 percent. Total outstanding currency swaps
increased 417 percent, from $3,194 billion at year-end
2000 to over $16.5 trillion by year-end 2009
10 Latest Info Regarding
Currency Swap
Government Should Hire Ex-Bank Staff Massi
vely:
Assocham
Cabinet Nod For Pact Between RBI, Central
Bank Of UAE
RBI, Sri Lanka Central Bank Sign Currency
Swap Pact
Japan, India expand currency swap arrangem
ent to $50 billion
Six major central banks make currency swap
accords
permamnent