A currency swap means an arrangement in which two parties exchange specific
amounts of different currencies initially, and a series of interest payments on
the initial cash flows are exchanged.
Often, one party will pay a fixed interest rate, while another will pay a
floating exchange rate (though there may also be fixed-fixed and
floating-floating arrangements). At the maturity of the swap, the principal
amounts are exchanged back. Unlike an interest rate swap, the principal and
interest are both exchanged in full in a currency swap.
An interest rate swap is a contract to exchange cash flow streams that might
be associated with some fixed income obligations, say swapping the cash flows of
a fixed rate loan for those of a floating rate loan. A currency swap is exactly
the same thing except, with an interest rate swap, the cash flow streams are in
the same currency. With a currency swap, they are in different currencies.
That difference has a practical consequence. With an interest rate swap, cash
flows occurring on concurrent dates are netted. With a currency swap, the cash
flows are in different currencies, so they can't net. Full principal and
interest payments are exchanged without any form of
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