What is the Difference Between Currency Swap and FX Swap?
🆚 Go to Comparative Table 🆚The main difference between a currency swap (also known as an FX swap) and a cross-currency swap lies in the exchange of interest payments on the loans during the life of the swap, in addition to the principal amounts at the beginning and end of the contract. Both types of swaps involve the exchange of two different currencies at inception. Here are the key differences:
- Currency Swap (FX Swap): In an FX swap, two parties exchange given amounts in two different currencies, and at the end of the agreement, they swap again at either the original exchange rate or another pre-agreed rate, closing out the deal. These swaps can be used to hedge against exchange rate risk, speculate on currency moves, and borrow foreign exchange at lower interest rates. They are often employed to raise foreign currencies for financial institutions, their customers, and institutional investors.
- Cross-Currency Swap: A cross-currency swap is similar to an FX swap, but in addition to the principal amounts, the two parties also exchange interest payments on the loans during the life of the swap. These swaps serve the same purpose as FX swaps on the interbank market, but they tend to be used during volatile periods and often have longer maturities, ranging from 1 to 30 years.
In summary, the main difference between an FX swap and a cross-currency swap is the exchange of interest payments on the loans during the life of the swap in the latter, while both types of swaps involve the exchange of principal amounts in different currencies.
Comparative Table: Currency Swap vs FX Swap
A table comparing the differences between Currency Swap and FX Swap:
| Feature | Currency Swap | FX Swap |
|---|---|---|
| Purpose | Medium to long-term hedging against adverse exchange rate movements | Short-term hedging against adverse exchange rate movements and rollover of forward contracts |
| Structure | Involves the exchange of interest payments on loans made in different currencies, and can also involve principal exchanges | Involves the exchange of two different currencies at inception and reversal of the same currencies at the end of the agreed-upon period |
| Interest Rate Payments | Yes, interest payments are exchanged on loans made in different currencies | No, interest rate payments are not exchanged |
| Principal Exchange | Can involve exchanging principal amounts of loans, which are exchanged back when the agreement ends | No principal exchange |
| Maturity | Typically medium to long-term, up to 10 years | Short-term, typically under 1 year |
| Types | Fixed-for-fixed rate swaps and fixed-for-floating rate swaps | Not applicable, as FX swaps do not involve interest rate payments |
In summary, currency swaps are used for medium to long-term hedging against adverse exchange rate movements and can involve exchanging interest payments and principal amounts of loans. In contrast, FX swaps are used for short-term hedging and involve the exchange of different currencies at the beginning and end of the agreed-upon period without interest rate payments or principal exchanges.
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