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Can you please explain to me in simple terms what a currency swap is?

Suppose an Indian company having a Japanese collaboration is able to get a yen denominated loan from a Japanese bank on attractive terms requiring repayment of loan instalments as well as periodic interest in Japanese yen whereas the company’s export earnings are in US dollars, it would naturally like to go for a swap under which it would be able to pay dollars with the counterparty agreeing to pay in Japanese yen.

In other words, a currency swap enables one to secure the benefit of natural edge that consists in foreign exchange earnings and foreign exchange obligations being denominated in the same currency so that there is no need to worry about exchange rate fluctuations which in turn obviates the need for taking cover against such fluctuations. A currency swap ideally should be done between a party and counterparty but if this is not possible, then one has to use the services of a bank maintaining a swap book.

S. MURLIDHARAN

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