What Is Currency Swap ? (Currency Swap Explained)

What Is Currency Swap ? (Currency Swap Explained)


Currency swap is a financial transaction where two business entities who are usually from different country exchanges principal and interest of loan in order to hedge interest rate risk that are usually inherent in sourcing for loans from international financial market. 

For example, let's say a Nigeria base company like Dangote group need 8 million dollars to invest in U.S  soil while a U.S company,  let's say ADIDAS needs 300 million naira to invest in business in Nigeria. In this case, if dangote group is to borrow directly from U.S Bank, he will have to pay a higher interest rate as foreign entity and so it is,  if Adidas that is a U.S  base company is borrowing from Nigeria banks. 

In this case, dangote group can borrow the amount that ADIDAS need from Nigeria bank at cheaper interest rate  and hand over to Adidas while Adidas borrow the amount that dangote need from U.S Bank at lower interest rate and hand over to dangote group. 

These two parties will pay  the principal amount and the interest without any legal  implication. 

HOW DOES TWO PARTIES THAT TRANSACT SWAP MEETS?

They meet on their own or through a bank or a broker. 


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