Difference between Currency and Interest Rate Swap

Currency Swap

The currency swap is a method that involves exchanging the cash flows that are generated from two currencies in order to make sure that the transactions get hedged against the exchange rate fluctuations. Conversely, currency swaps are also a foreign exchange agreement that is made between two parties to help in the exchange of cash flow streams from one currency to another.

While the currency swaps have two different currencies, the interest rate swaps deal with one single currency. The advantage of agreeing to a currency swap is that both the firms are able to secure loans at lower finance rates and then hedge that against the interest rate fluctuations in the market.

The variations are also existing in the currency swaps (including fixed and floating rates). In sum, the parties are also able to hedge their bets against the volatility in foreign exchange rates within the market and also secure the improved lending rates as well apart from receiving foreign capital from the investors. The currency swap is a very important financial instrument, and it helps to make sure that the volume of financial transactions in the economy is increased manifold with the help of these tools.

Interest Rate Swap

The interest rate swaps involve the exchange of cash flows between two parties generated at two different rates of interest. Any interest rate swap is basically a financial derivative contract where two different parties enter into an agreement in order to exchange their cash flows where the transactions are between notional amounts that are predetermined with fixed and floating rates.

The interest rate swaps are extremely important for any market, and they help the investors in their financial transactions with different parties.

Difference between Currency and Interest Rate Swap

Both currency and interest rate swaps have a very important role in the financial market. Companies can use these two financial instruments to take care of their short term and long term monetary needs. However, it must be noted that there are major points of difference between currency and interest rate swaps, and we should focus on those points below to get a wider perspective of these two instruments:

Currency Swap

Interest Rate Swap

Definition

The currency swap is a method that involves exchanging the cash flows that are generated from two currencies in order to hedge against the fluctuations in the exchange rate.

The interest rate swaps deal with the exchange of cash flows between two parties generated at two rates of interest.

Focus

The main focus of the currency swaps involves the exchange of any amount in one currency to another currency.

The main focus of the interest rate swaps involves the exchanging of interest payments between different parties.

Type of contract

Currency swaps are foreign exchange agreements between the two parties.

Interest rate swaps are financial derivative contracts between two parties.

Conclusion

There are a number of points of difference between currency and interest rate swaps. But both of them play a very crucial role in the functioning of financial markets. It also becomes essential that there are many more individuals and corporations who use these instruments for simplifying transactions. Both these financial instruments have a part to play in the overall development and growth of the economy of our country, both in the short as well as the long run.

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