Interest rate swaps involve the exchange of interest payments , Token swap platform development while currency swaps involve exchanging an amount of cash in one currency for the same amount in another.
Interest rate swaps
Interest rate swaps generally involve swaps between predetermined amounts with fixed rates and amounts with floating rates.
For example, suppose bank "X" owns a $10 million investment, which pays the London Interbank Rate of Interest , or LIBOR , plus 3% each month. Therefore, this is considered a floating payment because as LIBOR fluctuates, so does cash flow . On the other hand, suppose bank “Y” owns a $10 million investment, which pays a fixed rate of 5% each month. Bank “X” decides that it would prefer to receive a constant monthly payment. However, bank “Y” decides to risk receiving higher payments. Therefore, the two banks agree to enter into an interest rate swap agreement . Bank “X” agrees to pay bank “Y” the LIBOR plus 3% per month on the notional amount of $10 million. Bank “Y” agrees to pay bank “X” a fixed monthly rate of 5% on the notional amount of $10 million.
Currency Swaps
Conversely, foreign exchange or currency swaps are an exchange agreement between two parties to exchange cash flows in one currency for another. While currency swaps involve two currencies , interest rate swaps only deal in one specific currency.
For example, suppose bank “X” operates in the United States and deals only in US dollars , while bank “Y” operates in Russia and deals only in rubles . Suppose bank “Y” has investments in the United States worth $5 million. Now suppose that the two banks agree to enter into a currency swap. Bank “X” agrees to pay Bank “Y” LIBOR plus 1% per month on the notional amount of $5 million dollars. Bank “Y” agrees to pay bank “X” a fixed monthly rate of 5% on the notional amount of 253,697,500 Russian rubles, assuming that $1 dollar is equal to 50.74 rubles.
