Currency Swap Arrangements

Recently, the RBI decided to address the liquidity deficit in the banking system by bond purchases & a $10B dollar/rupee buy/sell forex swap. 𝐁𝐮𝐭 𝐰𝐡𝐚𝐭 𝐢𝐬 𝐚 𝐟𝐨𝐫𝐞𝐱 𝐬𝐰𝐚𝐩?   A financial agreement where two parties exchange currencies today & agree to reverse the transaction at a future date at a pre-determined rate   Let's consider the RBI's example:  ✔️ RBI is planning to enter into the dollar/rupee buy/sell forex swap for 3 years ✔️ RBI will buy $10B from banks today, giving them ₹86,950 crore (at 1 USD = 86.95 INR) ✔️ For the sake of this example, let's consider a pre-agreed swap rate for 2027 is set at 1 USD = 88 INR (i.e., banks will return ₹88,000 crore to RBI in exchange for $10B) ✔️ After 3 years, banks must return the rupees, and the RBI will return the $10B   The USD/INR rate will not necessarily be at 1 USD = 88 INR 𝐒𝐜𝐞𝐧𝐚𝐫𝐢𝐨 𝟏: 𝐑𝐮𝐩𝐞𝐞 𝐃𝐞𝐩𝐫𝐞𝐜𝐢𝐚𝐭𝐞𝐬 (𝟏 𝐔𝐒𝐃 = 𝟗𝟎 𝐈𝐍𝐑 𝐢𝐧 𝟐𝟎𝟐𝟕) - Banks need ₹90,000 crore to buy back $10B at market rates - But they only need to return ₹88,000 crore to RBI as per the swap - Banks 𝐠𝐚𝐢𝐧 ₹𝟐,𝟎𝟎𝟎 𝐜𝐫𝐨𝐫𝐞 because they are buying back dollars cheaper than the market price 𝐒𝐜𝐞𝐧𝐚𝐫𝐢𝐨 𝟐: 𝐑𝐮𝐩𝐞𝐞 𝐀𝐩𝐩𝐫𝐞𝐜𝐢𝐚𝐭𝐞𝐬 (𝟏 𝐔𝐒𝐃 = 𝟖𝟓 𝐈𝐍𝐑 𝐢𝐧 𝟐𝟎𝟐𝟕) - Banks need only ₹85,000 crore to buy back $10B at market rates - But they are locked into returning ₹88,000 crore to RBI as per the swap - Banks 𝐥𝐨𝐬𝐞 ₹𝟑,𝟎𝟎𝟎 𝐜𝐫𝐨𝐫𝐞 since they are buying back dollars at a higher-than-market price   𝐖𝐡𝐲 𝐝𝐨 𝐛𝐚𝐧𝐤𝐬 𝐩𝐚𝐫𝐭𝐢𝐜𝐢𝐩𝐚𝐭𝐞? ✔️ Instant Liquidity – Banks get ₹86,950 crore today, which addresses the liquidity deficit issue in our example. They can lend or invest ✔️Potential Forex Gains – If INR weakens beyond the pre-agreed swap rate, they profit ✔️ Interest Rate Arbitrage – If banks invest the rupees in high-yield instruments, they can earn extra returns over 3 years   Banks borrow ₹86,950 crore today, but their final cost depends on where USD/INR stands in 3 years compared to the pre-agreed swap rate (₹88). If INR weakens, they win; if it strengthens, they lose.

🇺🇸🌎💵 Central banks worldwide are quietly preparing contingency plans as doubts grow over the reliability of dollar swap lines, the financial lifelines that have stabilised global markets since 2008. With Fed Chair Jay Powell set to leave in 2026 and Trump pushing the Fed to cut rates despite early inflation signals, these once-sacred agreements face unprecedented uncertainty. During the 2008 crisis, the Fed activated $583B in swap lines for non-US central banks. Another $450B flowed during Covid-19, preventing global financial contagion. These arrangements let foreign central banks access dollars when their commercial banks face funding shortages, addressing the core issue that only the Fed can print the world's reserve currency. Since then, US Vice President JD Vance has said he "hate[s] bailing Europe out," while Treasury Secretary Scott Bessent views finance, military, trade, and technology as deeply linked. As a result, future swap line access may come with political conditions. Would Denmark get dollar support without concessions on Greenland? Does the Pentagon's review of the submarine pact with Britain and Australia suggest allied agreements no longer enjoy automatic protection? European Central Bank officials remain publicly confident, yet the ECB recently asked banks to report dollar exposure vulnerabilities. Think tank CEPR has proposed a mutual pact in which 14 central banks use their combined $1.9T in dollar holdings to support each other if Fed swap lines vanish. Central banks are already taking defensive measures, increasing gold purchases and negotiating alternative arrangements with China. Bruno Colmant notes that stablecoins represent a further fundamental shift in dollar creation, bypassing traditional central bank swaps. Private American companies now issue dollar-backed tokens by buying US Treasury bills, effectively forcing foreign holders to finance US debt directly rather than through central bank channels. This ties to Izabella Kaminska's multilateral vision fund idea, which Sec. Bessent publicly supports. In his and Trump’s view, Japan, Korea, and European allies should invest their capital surplus in US manufacturing while America provides military protection and technology transfers. As Izabella notes, the setup resembles a reverse Marshall Plan, turning decades of trade surpluses into equity stakes in American industry. Weakening swap line reliability and rising stablecoin adoption could accelerate dollar system fragmentation. Treasury-backed stablecoins may prove safer than traditional bank deposits tied to central bank swaps, creating incentives for systemic change. Nixon’s 1971 exit from Bretton Woods caused monetary chaos but ultimately strengthened the dollar. Today’s shifts could prove equally disruptive, forcing central banks to choose between dollar dependence and monetary sovereignty. -- More analysis on monetary transformation in the NL Euro Stable Watch, which I co-edit with Marieke Flament 💶

Ethiopia is now in active talks with China to convert a portion of the $5.38 billion debt it owes Beijing from U.S. dollar–denominated terms into yuan, following a blueprint set recently by Kenya. As reported by Bloomberg, Ethiopia’s central bank governor, Eyob Tekalign, met with representatives from The Export-Import Bank of China and the People's Bank of China in Beijing to explore a currency-swap restructuring. This move has multiple implications. At one level, it signals China’s continued push for its currency’s greater role in global finance—and in particular, in development finance for African economies. At another level, it reflects Ethiopia’s search for greater flexibility amid debt pressures and currency volatility. By shifting liability from dollars to yuan, Ethiopia may aim to mitigate exposure to dollar fluctuations and potentially secure more favorable terms. Yet it also exposes the country to new risks tied to yuan valuations and China’s monetary policy. For policymakers and business leaders, this development is a reminder that the conventional dominance of the dollar in international lending is not immutable. Emerging markets and creditor nations are experimenting with alternative frameworks and instruments to rebalance risk, influence, and currency strategy. As the global economy continues to evolve, we might increasingly see hybrid debt structures, local currency lending, and more multipolar reserve currency dynamics. This isn’t just about one bilateral debt deal — it speaks to how nations are rethinking financial sovereignty, currency exposure, and development finance architecture for the years ahead. https://lnkd.in/gm26xWe7

Cross Currency Swap Theory & Practice - An Illustrated Step-by-Step Guide of How to Price Cross Currency Swaps with an Excel pricing workbook example. A Cross Currency Swap (CCS) is a financial instrument that allows investors to exchange a set of cashflow liabilities for an equivalent set in another currency, often USD. Investors trade CCS to secure cheaper funding, hedge FX exposures, manage liquidity risk and of course for speculative purposes. In this paper we review the CCS product, its features and risks. We show how to price CCS and provide the mathematical formulae with examples & illustrations. Furthermore we outline how to calculate the CCS Basis Spread, which is how CCS are quoted in the financial marketplace. The article comes with an Excel pricing workbook. Cross Currency Swap Pricing https://lnkd.in/dtbzT5eW Excel Workbook https://lnkd.in/dPcf24Tt #quant #finance #trading #pricing #risk #crosscurrency #swaps #basis #spread

💱 What is a Currency Swap? A currency swap is a financial derivative contract in which two parties exchange principal and interest payments in different currencies The swap typically involves: 1️⃣ Initial exchange of principal amounts in different currencies 2️⃣ Periodic exchange of interest payments (which can be fixed or floating) 3️⃣ Final re-exchange of the principal amounts at the end of the swap term 🔁 Purpose of a Currency Swap Currency swaps are used by: 🔅 Corporates: To hedge against foreign currency debt 🔅 Governments: To manage foreign reserves or funding costs 🔅 Investors and banks: To gain access to cheaper foreign funding or exposure Imagine 💡 1️⃣ A Sri Lankan company (Company A) has a loan in USD but earns in LKR 2️⃣ A U.S. company (Company B) has a loan in LKR (perhaps via a local subsidiary) but earns in USD They can enter a currency swap to exchange their obligations and reduce foreign exchange risk 🔄 Step-by-Step: How a Currency Swap Works 👥 Parties: Company A (Sri Lanka): Needs USD Company B (USA): Needs LKR Step 1️⃣ : Initial Principal Exchange 🔹 Company A gives LKR 32 million (at LKR 320/USD) 🔹Company B gives USD 100,000 This allows each party to access the currency they need without going to the forex market Step 2️⃣ : Periodic Interest Payments (e.g., annually) Let’s assume a 3-year swap: 🔹 Company A pays interest on USD 100,000 at 5% annually → USD 5,000 🔹 Company B pays interest on LKR 32 million at 12% annually → LKR 3.84 million Each party pays interest in the currency it originally received. Step 3️⃣ : Final Re-exchange of Principal At the end of 3 years: 🔹 Company A returns USD 100,000 🔹 Company B returns LKR 32 million This protects both companies from exchange rate volatility during the contract period 🧠Currency swaps are a useful tool for multinational companies to manage foreign currency liabilities, reduce financing costs, and hedge long-term FX risk But they must be entered with clear legal agreements and understanding of counterparties #RiskManagement #CorporateFinance #FinancialStrategy #TreasuryManagement #DerivativeMarkets #CurrencyTrading #HedgingStrategies #ForeignExchangeRisk #OptionsTrading #FinancialMarkets #CFRM #SL02

Steps to Price a Currency Swap 📊📊📊 🎯 1. Understand the Currency Swap Structure A currency swap involves exchanging principal and interest payments in one currency for those in another. Typically, one side pays a fixed interest rate, and the other pays a floating rate, although fixed-fixed structures are also common. 🎯 2. Gather Inputs - Principal amounts for both currencies. - Fixed and floating interest rates for each currency. - Spot exchange rate and, if necessary, forward rates for the currency pair. - Discount rates from the respective yield curves of the currencies. - Swap tenor and payment frequency (e.g., quarterly, semi-annual). 🎯 3. Calculate Fixed Leg Cash Flows Determine the periodic fixed interest payments in the fixed-rate currency. Discount these payments to the present using the discount factors from the yield curve. Fixed Payment = Notional Amount × Fixed Rate × Day Count Fraction 🎯 4. Calculate Floating Leg Cash Flows Identify the floating interest rate for each period (typically tied to benchmarks like LIBOR or SOFR). Calculate periodic floating interest payments and discount them to the present. Include the notional repayment at the end of the swap if applicable. Floating Payment = Notional Amount × Floating Rate × Day Count Fraction 🎯 5. Incorporate Spot and Forward Rates Spot rates are used to convert initial or current cash flows between currencies. Forward rates may be used to value cash flows expected in the future, as they account for the time value of money and interest rate differentials between the currencies. 🎯 6. Convert Cash Flows to a Common Currency Use the spot rate or forward rates to convert the cash flows of one currency into another. 🎯 7. Net the Present Values Calculate the difference between the present value of the fixed and floating legs, ensuring all values are in the same currency. 🎯 8. Include Principal Exchange (if applicable) If the swap involves exchanging principals at the start and/or end, include these amounts in the valuation. Note: 📊📊 🎯 Spot Rate: Used for initial principal exchanges and converting immediate cash flows into the counter currency. 🎯 Forward Rate: Used to value future cash flows, as it accounts for the interest rate differential between the two currencies over time. It is derived from spot rates and interest rates for both currencies. #CurrencySwap #InterestRates #SpotRate #ForwardRate #QuantFinance #FixedIncome #Derivatives #SwapValuation #FinancialModeling #RiskManagement

𝗖𝘂𝗿𝗿𝗲𝗻𝗰𝘆 𝗦𝘄𝗮𝗽𝘀 𝗶𝗻 𝗦𝗶𝗺𝗽𝗹𝗲 𝗧𝗲𝗿𝗺𝘀 Currency swaps are essential derivative instruments for companies and investors operating in international markets. They allow the conversion of payment flows from one currency to another while benefiting from preferential interest rates. When a company borrows in a foreign currency, it is often exposed to exchange rate fluctuations and to potentially higher interest rates compared to borrowing in its local currency. A currency swap can help optimize costs by leveraging comparative advantages in different interest rate environments. Take two companies, A (AAA-rated) and B (BBB-rated), both needing to borrow €10M for five years. A prefers a floating-rate loan but can borrow at 4% fixed or EURIBOR + 30 bps. B prefers a fixed-rate loan but faces 5.2% fixed or EURIBOR + 100 bps. The fixed-rate spread is 1.2% (5.2% - 4.0%), while the floating-rate spread is only 0.7% (EURIBOR + 100 - EURIBOR + 30). This means B has a relative advantage in floating-rate borrowing, while A benefits more in the fixed-rate market, creating an opportunity for a swap to lower costs for both. 𝗘𝘅𝗮𝗺𝗽𝗹𝗲: A European Company Seeking to Borrow in USD A direct loan in USD would cost the company 6% annual interest. However, it can borrow in EUR at a rate of 3%. Using a EUR/USD currency swap, it can convert its EUR-denominated loan into a USD liability, benefiting from the lower EUR interest rate and securing a fixed exchange rate for future USD payments. 𝟮. 𝗛𝗼𝘄 𝗮 𝗖𝘂𝗿𝗿𝗲𝗻𝗰𝘆 𝗦𝘄𝗮𝗽 𝗪𝗼𝗿𝗸𝘀: 𝗖𝗮𝘀𝗵 𝗙𝗹𝗼𝘄s A currency swap is a contract in which two parties exchange interest payments and/or principal amounts in different currencies. 𝗞𝗲𝘆 𝗙𝗲𝗮𝘁𝘂𝗿𝗲𝘀: 𝗘𝘅𝗰𝗵𝗮𝗻𝗴𝗲 𝗼𝗳 𝗻𝗼𝘁𝗶𝗼𝗻𝗮𝗹 𝗮𝗺𝗼𝘂𝗻𝘁𝘀: At the beginning of the swap, the parties exchange a principal amount in their respective currencies. At maturity, they return these notional amounts. 𝗘𝘅𝗰𝗵𝗮𝗻𝗴𝗲 𝗼𝗳 𝗶𝗻𝘁𝗲𝗿𝗲𝘀𝘁 𝗽𝗮𝘆𝗺𝗲𝗻𝘁𝘀: Each party pays an interest rate in the currency they borrow and receives an interest rate in the other currency. 𝗙𝗶𝘅𝗲𝗱 𝗼𝗿 𝗳𝗹𝗼𝗮𝘁𝗶𝗻𝗴 𝗶𝗻𝘁𝗲𝗿𝗲𝘀𝘁 𝗿𝗮𝘁𝗲𝘀: Swaps can be fixed-to-fixed or fixed-to-floating. Suppose a European company needs $100 million for a project. Instead of borrowing directly in USD, it opts for a currency swap. 𝗦𝘁𝗲𝗽𝘀 𝗼𝗳 𝘁𝗵𝗲 𝗦𝘄𝗮𝗽: 1. The company borrows €90 million (equivalent to $100 million at an exchange rate of 1 EUR = 1.11 USD). 2. It immediately exchanges the euros for dollars through a currency swap. 3. The company pays interest in USD at an agreed rate while receiving interest payments in EUR. 4. At maturity, the two parties re-exchange the notional amounts, and the company recovers its euros to repay the original loan. This strategy enables the company to benefit from a lower EUR interest rate while securing its USD payment obligations at a known exchange rate. #CurrencySwaps #FXMarkets #RiskManagement

Issue 10: Navigating "Elusive" Hedging Structures Advising on hedging transactions can be particularly challenging due to their complexity. Typically, in response to VND/USD depreciation, holders of VND seek hedging solutions to mitigate foreign exchange risks - for instance, a Vietnamese borrower with a USD loan would engage in a cross-currency swap to manage currency and interest rate risks, while an offshore investor in VND bonds would use forward contracts to protect their returns. Below is an overview of the relevant Vietnamese regulations: (1) Onshore Borrower/Issuer Perspective: (+) Onshore borrowers are allowed to enter into currency and cross-currency swaps (and other hedging products) with licensed Vietnamese banks or foreign bank branches. However, these products are generally suitable only for smaller loans due to the limited USD reserve capacity of Vietnamese banks compared to foreign banks. (+) Under current FX regulations, onshore borrowers cannot hedge directly with foreign financial institutions or banks. However, for large-scale project financing, onshore borrowers may apply for special approval from the State Bank of Vietnam (SBV), which is granted on a case-by-case basis. (+) In offshore/onshore lending transactions, Vietnamese borrowers typically engage in back-to-back hedging with a foreign bank branch in Vietnam. This local branch then enters into a corresponding hedge with its parent bank. (2) Offshore Lender/Investor Perspective: (+) According to current laws, hedging through Vietnamese banks for VND bonds subscribed by foreign investors is restricted to government-guaranteed bonds only; private bonds do not qualify. (+) Offshore investors must seek non-deliverable forwards (NDFs) on the offshore market and factor in the associated hedging costs into the coupon or make-whole amounts. Notably, there is only a two-year forward FX market for USD/VND hedging available. This necessitates repricing after two years—a scenario likely unfavourable for issuers—which can be addressed by implementing refinancing options every two years.

When I started to trade cross-currency swaps I noticed that most end users didn’t care much about the basis. Some investors that use this market just compare bond yields in one currency to those same yields swapped into another one. They decide to trade the instrument if they get any yield advantage. That yield advantage has a few explanations, but one of the most important comes from the cross-currency basis swap – CCBS. In a CCBS you exchange two variable rates. Nowadays it is mostly SOFR for the dollar leg against the main variable rate in other currencies like ESTR for the EUR. The basis is usually understood as the extra spread you add to the non-dollar variable rate leg. This spread can be positive or negative with the market fluctuating a lot depending on flows and expectations. If you get a positive spread in an emerging market CCBS, this typically means you can buy dollar denominated debt and swap it into your local currency and get a yield advantage. To have a view on the basis you can think of the hedging strategies market makers use. You can hedge a CCBS using a series of rolling FX forwards. For example, if you are paying SOFR and receiving local variable rate + basis in a USD vs EM FX CCBS you can buy USD EMFX 3 months forward and roll it over the life of the swap. This hedge works because the rolling forwards act as rolling short term interest rates differential + the implied basis. The basis has strong mean reverting properties and is also heavily influenced by factors such as short squeezes. Therefore, it is always a good idea to analyze the behavior of this quantity throughout history. In the chart below you can observe how this implied basis swap has a mean close to zero but also has a very heavy left tail. This means you should be wary when getting into payer positions. If you are an investor who swaps debt from one currency into another it is always a good idea to have a view on the direction of the basis. It can give you an extra edge with your strategies. What do you think? #derivatives #emergingmarkets #bonds

📍🇳🇬 | 🇨🇳 | Recent reports confirm that some Chinese traders are accepting Nigerian naira instead of U.S. dollars, largely due to a renewed currency swap agreement between Nigeria and China. This deal, originally signed in April 2018 and renewed in December 2024, allows direct trade in naira and Chinese yuan, bypassing the U.S. dollar to reduce transaction costs and ease pressure on dollar demand. The agreement, valued at approximately $2 billion, aims to facilitate trade by providing liquidity in both currencies for businesses. Forex traders and the President of the Association of Bureau De Change Operators of Nigeria have noted that this swap, along with peer-to-peer forex platforms, has contributed to recent naira stability.