DEFINITION of 'Reciprocal Currency Arrangement'

Temporary arrangement between central banks to maintain a supply of a country's currency for trade with other central banks at a specified exchange rate. A reciprocal currency arrangement is only intended for overnight or short-term lending in order to maintain reserve requirements, liquidity and to keep financial markets functioning smoothly.

Also known as a swap line or swap network.

BREAKING DOWN 'Reciprocal Currency Arrangement'

Reciprocal currency arrangements exist to provide short-term access to foreign currencies. In the U.S., for example, a reciprocal currency arrangement entails both a spot (immediate delivery) transaction, where the Federal Reserve transfers dollars to a central bank and receives foreign currency in exchange; and a concurrent forward (future delivery) transaction, where the two central banks consent to reversing the spot transaction at a specified date. One purpose of a reciprocal currency arrangement is the support of a country's currency during periods of uncertainty or unusual market disruptions.

RELATED TERMS
  1. Reciprocal Insurance Exchange

    A form of insurance organization in which individuals and businesses ...
  2. Swap Network

    A worldwide network of central banks that establish a reciprocal ...
  3. Sectoral Reciprocity

    A trade agreement between two countries to reduce or eliminate ...
  4. Reciprocal Currency

    In the foreign exchange market, a currency pair that involves ...
  5. Reciprocal Statutes

    Legislation enacted between two or more states promoting commerce. ...
  6. Harmonic Average

    The mean of a set of positive variables. Calculated by dividing ...
Related Articles
  1. Investing

    Why Countries Keep Reserve Currency

    Central banks and financial institutions hold large amounts of foreign money as their reserve currency.
  2. Trading

    What Happens in a Currency Crisis?

    A currency crisis comes from a decline in the value of a country’s currency.
  3. Insights

    A Primer On Reserve Currencies

    For nearly a century, the U.S. dollar has served as the world's premier reserve currency, but the future is uncertain.
  4. Insights

    The Currency Board: Understanding The Government's Bank

    Currency board, central bank - what's the difference? Find out more about this little-known monetary authority.
  5. Trading

    How Inflation-Fighting Techniques Affect The Currency Market

    Central banks use these strategies to calm inflation, but they can also provide longer-term clues for forex traders.
  6. Trading

    The Forex Market: Who Trades Currency And Why

    The forex market has a lot of unique attributes that may come as a surprise for new traders.
  7. Investing

    Explaining Fixed Exchange Rates

    A government using a fixed exchange rate has linked the value of its currency to the value of another country’s currency, or the price of gold.
  8. Trading

    What Causes A Currency Crisis?

    Find out what can cause a currency to collapse and what central banks can do to help.
  9. Insights

    What Are Central Banks?

    They print money, they control inflation, and much, much more. All you need to know about central banks is here.
  10. Trading

    Drastic Currency Changes: What's The Cause?

    Currency fluctuations often defy logic. Learn the trends and factors that result in these movements.
RELATED FAQS
  1. How do central banks acquire currency reserves and how much are they required to ...

    A currency reserve is a currency that is held in large amounts by governments and other institutions as part of their foreign ... Read Answer >>
  2. What is foreign exchange?

    Foreign exchange, or Forex, is the conversion of one country's currency into that of another. In a free economy, a country's ... Read Answer >>
  3. How can a company hedge with currency swaps?

    Read a brief overview of how currency swap exchanges function, why a swap bank is necessary, and how the parties involved ... Read Answer >>
  4. How can I invest in a foreign exchange market?

    The foreign exchange market, also called the currency market or forex (FX), is the world's largest financial market, accounting ... Read Answer >>
  5. How are international exchange rates set?

    International currency exchange rates display how much one unit of a currency can be exchanged for another currency. Currency ... Read Answer >>
  6. What are the benefits of engaging in a currency swap?

    Read about the benefits of engaging in a currency swap, such as when companies in different countries want to borrow funds ... Read Answer >>
Hot Definitions
  1. Graduate Management Admission Test - GMAT

    A standardized test intended to measure a test taker's aptitude in mathematics and the English language. The GMAT is most ...
  2. Magna Cum Laude

    An academic level of distinction used by educational institutions to signify an academic degree which was received "with ...
  3. Cover Letter

    A written document submitted with a job application explaining the applicant's credentials and interest in the open position. ...
  4. 403(b) Plan

    A retirement plan for certain employees of public schools, tax-exempt organizations and certain ministers. Generally, retirement ...
  5. Master Of Business Administration - MBA

    A graduate degree achieved at a university or college that provides theoretical and practical training to help graduates ...
  6. Liquidity Event

    An event that allows initial investors in a company to cash out some or all of their ownership shares and is considered an ...
Trading Center