- Currency swap agreements are between central banks of two countries.
- One country exchanges its national currency for another’s.
- Example: India gets Yen/dollars from Japan, Japan gets Indian Rupees.
- The exchange is reversed later at the same initial exchange rate.
- This provides a country with a credit line in foreign currency.
- It acts as an additional buffer for foreign exchange reserves.
- It helps maintain stability in foreign exchange and capital markets.
- It carries no exchange rate or other market risks as terms are set in advance.