Dual Currency Swap


DEFINITION of 'Dual Currency Swap'

A currency swap used to hedge the risk associated with the issuance of a dual currency bond. A dual currency swap allows the bond issuer to repay the principal and coupon in the base currency or another currency. Exchange rates are preset in dual currency swaps.

BREAKING DOWN 'Dual Currency Swap'

A dual currency swap is essentially a mirror of a dual currency bond; in a dual currency swap, the issuer exchanges a floating rate for a fixed one. The bond issuer is willing to take on the currency risk in order to lower borrowing costs by making payments in a currency other than the base currency.

For example, suppose that a company borrows $50 million to update a manufacturing facility. In order to reduce borrowing costs, the company enters into a dual currency swap involving euros. The company pays the swap counterparty the $50 million for the equivalent amount of euros, and receives interest payments in dollars at a fixed rate (which allow the company to service the bond). Upon the bond's maturity, the company receives the $50 million, and pays the counterparty the equivalent value in euros.

  1. Swap

    A derivative contract through which two parties exchange financial ...
  2. Exchange Rate

    The price of a nation’s currency in terms of another currency. ...
  3. Dual Currency Bond

    A debt instrument in which the coupon and principal payments ...
  4. Fixed-For-Fixed Swaps

    An arrangement between two parties (known as counterparties) ...
  5. Risk

    The chance that an investment's actual return will be different ...
  6. Dual Currency Issue

    A bond that pays interest in one currency but pays the principal ...
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