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.

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