Currency Swaps

A swap is an agreement between two counterparties to exchange cash flows of different features at specified future times or at specific periodic intervals. It has been observed in Chapter 11 that the swap is one of the three major types of derivatives securities widely used in risk management, with the other two being forwards/ futures and options. A swap with which exchange of cash flows is all made in one currency is simply called swaps or interest rate swaps. A swap involving exchange of cash flows denominated in two currencies is commonly referred to as the currency swap, which, though, includes exchange of principals as well. Obviously, there is no need to exchange principals where all cash flows are denominated in the same currency.