What Happens In Currency Swap Agreement

On March 19, 2020, the United States opened temporary swap agreements with central banks in Australia, Brazil, Denmark, South Korea, Mexico, Norway, New Zealand, Singapore and Sweden, worth a total of $450 billion for at least six months. The U.S. Federal Reserve has permanent swap agreements with the world`s various central banks. However, currency swaquage lines, such as China, Saudi Arabia, etc. (G-20 group with the exception of India) do not have currency swp lines with the US Federal Reserve. Unsecured CSTs (i.e. bilaterally implemented without a credit support appendix (CSAs) expose trading partners to financing and credit risks. Financing risk, because the value of the swap could become so negative that it is prohibitive and cannot be financed. credit risks, because the counterparty concerned, for which the value of the swap is positive, will be concerned about the adverse counterparty`s non-compliance with its obligations. India and Japan signed a currency exchange agreement during Prime Minister Modi`s visit to Japan on October 28, 2018.

The currency exchange agreement is worth $75 billion and is a great opportunity for India to obtain foreign currency by trading rupees in Japan. One approach to avoid this is to choose a currency as a financing currency (for example. B USD) and choose a curve in that currency as a discount curve (e.g. B the usd interest rate curve versus 3M LIBOR). Cash flows in the financing currency are discounted on this curve. Cash flows in any other currency are first exchanged to the financing currency through a cross-exchange swap and then discounted. [5] For more information, please see the interest rate swap and pricing, as well as a description of the corresponding curves. Currency swap agreements can be bilateral or multilateral.

The first swea, signed on February 28, 1962, took place between the U.S. Federal Reserve and the French Central Bank. The benefits of the swap will be split equally between the two parties. According to initial reports, the swap, in addition to the Japanese yen and the Indian Rube, is a U.S. dollar. As part of the agreement, the Bank of Japan (Central Bank of Japan) will accept the rupees and give the dollar to the Reserve Bank of India (RBI), and the RBI will take the yen and give dollars to the Bank of Japan to stabilize the other currency. This agreement will allow India and Japan to trade in their own currencies and ease pressure on India`s current account balance. During the 2008 financial crisis, the Federal Reserve allowed several developing countries facing liquidity problems to use foreign exchange for credit purposes.

The Indian currency is still overvalued and is expected to depreciate further, so a fixed exchange rate will benefit India and reduce THE risks associated with FOREX.