Swap
A swap is an agreement where two parties exchange assets or liabilities with clear understanding on both sides to avoid risks and losses. This concept is old and can be seen in the story of Lord BalaKrishna, who was swapped to avoid danger and delay Kamsa's plans.
In today's financial world, swaps help manage risks. For example, a businessman with a floating rate loan might prefer a fixed rate loan for stability. If his bank can't provide this, he can arrange an interest rate swap through a consultant. This means he swaps his floating rate payments for fixed rate payments with another party, making his financial situation more predictable.
Currency swaps work similarly. Businesses trading internationally face risks from changing exchange rates. A currency swap lets them exchange cash flows in different currencies, locking in exchange rates and protecting against fluctuations. This makes financial planning easier and more secure.
There are many types of swaps, like interest rate swaps and currency swaps, each helping businesses manage risk and achieve stability. Swaps are not just financial deals, these tools help companies plan better, make informed decisions, and protect against market changes.
By CA L.Muralidharan and CPA L.Mukundan
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