Currency Swap

A currency swap involves the exchange of principal and interest of a loan in one currency for a similar loan in another currency. The two organizations involved in the currency swap, periodically exchange cash in order to obtain financing at a lower interest rate than available in the local market and to gain exposure to their desired currency.

Consider an example, suppose a US company A wants to start its business in India for which it gets $10 million in the form of a loan from US market and exchanges this amount with an Indian company B. Now company A has Indian currency for doing business in India and company B has US currency and they can bear the advantage of foreign exchange earnings. It means both companies are benefitted with a single deal of currency swap.