When two borrowers engage in a currency swap,they agree to:
A) trade one currency for another, thus avoiding the foreign exchange market.
B) make payments on each other's borrowings in a different currency.
C) pay to each other any depreciation or appreciation of the currency.
D) exchange fixed-rate interest payments for variable-rate interest payments.

Question

Quizplus · Accepted Answer

In a currency swap, two borrowers agree to make payments on each other's borrowings in a different currency. This is done to manage or eliminate currency risk. For example, if a US borrower has a loan in Japanese yen, and a Japanese borrower has a loan in US dollars, they could engage in a currency swap to exchange the currency of their loan payments. The US borrower would make payments in US dollars to the Japanese borrower, while the Japanese borrower would make payments in yen to the US borrower.

When Two Borrowers Engage in a Currency Swap,they Agree To