In its simplest form, this involves exchanging principal and interest payments in one currency for principal and interest payments in another. A currency swap agreement requires the principal to be speciﬁed in each of the two currencies. The principal amounts are usually exchanged at the beginning and at the end of the life of the swap. Usually the principal amounts are chosen to be approximately equivalent using the exchange rate at the swap’s initiation. When they are exchanged at the end of the life of the swap, their values may be quite diﬀerent.
In this swap a company agrees to pay cash ﬂows equal to interest at a predetermined ﬁxed rate on a notional principal for a predetermined number of years. In return, it receives interest at a ﬂoating rate on the same notional principal for the same period of time.
A swap is an over-the-counter agreement between two companies to exchange cash ﬂows in the future. The agreement deﬁnes the dates when the cash ﬂows are to be paid and the way in which they are to be calculated. Usually the calculation of the cash ﬂows involves the future value of an interest rate, an exchange rate, or other market variable.