Applied International Finance

CHAPTER 4

Currency Swaps

The advent of swaps, as much as anything else, helped transform the world’s segmented capital markets into a single, truly integrated, international capital market.

—John F. Marshall and Kenneth R. Kapner (1993)

A currency swap is a contract to exchange two streams of future cash flows in different currencies. Currency swaps were designed to circumvent capital controls imposed by governments and to make borrowing more efficient in global markets. We will see that currency swaps are used to convert debt denominated in one currency into synthetic debt denominated in another currency. Synthetic debt created in this way sometimes allows a segment of the capital market to be tapped that would otherwise not be accessible with ...