Currency interest rate swap is an interest rate swap that is carried out with different currencies. In addition to exchanging interest payments at different interest rates, interest payments themselves are expressed in different currencies. Despite the complexity of the design, there are a lot of examples of this operation and they are very common in everyday life.
Example of an interest rate swap transaction:
- You have financial obligations, and you urgently need to close them, but the problem is that they are not in local currency but in USD. You decide on a loan and are ready to take a loan. However, the rates on foreign currency loans are very high and extremely unprofitable for you;
- By coincidence, you have a friend in the United States who collaborates with Russian suppliers and makes payments in. Just at that moment, he needed a large sum in RUB, and the rates on such loans in his country were also unacceptable;
Thus, you take a loan in RUB for your friend, and he takes a loan in USD in his country, and you exchange these amounts. According to your agreement, the refund will occur in 5 years. All this time, in fact, your friend pays interest on your loan, and you pay interest on his loan. When the maturity date comes, you return him his USD, and he returns your currency.
“What is the benefit?” You ask. And the benefit is that by taking loans in your base currencies, you significantly save on interest and pay less to banks. In addition to reducing interest, you have a built-in mechanism to protect against changes in interest rates and exchange rate differences, which very often carry additional burdens when working with loans in foreign currency.