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Currency Swap
What is a currency swap transaction?
Currency swap transaction is a transaction according to which a bank and a client buy or sell an agreed sum of one currency for another currency and agree to sell or purchase the same sum of currency for another currency in the future for the price established during the time of concluding the transaction.
Let us assume that the bank concludes a six-month currency swap agreement according to which the bank receives Dollars and transfers Litas to the client. Six months later the bank pays back dollars to the client and the latter returns Litas to the bank. Such a transaction is practically registered as two currency sale and purchase transactions: a simple one (the client sells Dollars for Litas) and an advance one (six months later the client buys the Dollars for Litas back).
As the sale and purchase rates are agreed exactly at the same time, the risk of change in currency exchange is eliminated.
Advantages of the currency swap transaction:
- A currency swap transaction helps manage and regulate money flows at present and in the future;
- By means of a currency swap transaction it is possible to extend or shorten the duration of already concluded advance transaction;
- There are no additional charges;
- There is no minimum sum of transactions;
- It is faster and cheaper to conclude a swap than to deposit one currency and take a loan;
- It is more useful to conclude a swap transaction than to buy currency and later sell it;
- Currency swap transactions are concluded for as long as a twelve-month period.
When does it make sense to conclude a currency swap transaction?
- A currency swap transaction can be used very efficiently in regulating money flows.
Suppose now you have Dollars and you know that within three months you will definitely need them. You need Litas for your everyday needs. You can choose - to sell Dollars for Litas and three months later pay back the dollars or to make a deposit in Dollars with the bank and to take a loan in Litas from the bank. In the first case you risk that within three months the Dollar will go up in price and due to changes in the exchange rate you will suffer losses. In the second case it can take a lot of time to prepare documents for receiving a loan from the bank and it is often the case that money is needed immediately.
In this situation the best solution is to choose a three-month currency swap transaction. Having made such a transaction you would sell Dollars to the bank for Litas and at the same time would agree on buying back Dollars three months later according to the currency exchange rate on the day of making the transaction and would be able to settle accounts for the goods.
- The currency swap transaction can also be used as a means to extend or reduce the duration of already made advance transactions.
For example, you have made an advance currency swap transaction. Before the expiry of the deadline for settling accounts according to it, the date when you need certain currency changed. Having made the currency swap transaction, you can reduce or extend the duration of the advance transaction.
| For more information about currency swap transactions make a call by phones +370 5 266 4657, +370 5 266 4623 in Vilnius or send an electronic query. |
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