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Investment in Swaps

 

Swaps - an investment tool used rarely at investing process. Typically, these contracts are used by financial institutions or other big companies in order to exchange cash flows in different currencies. In fact, swap contract is equivalent to two currency exchange transactions. For example, if you have USD, and you know that you will have to pay this amount of USD for suppliers in a month, but now you are needed of EUR, but you will receive a needed amount of EUR only after one month.


In this case, is most convenient to make a swap: give owned USD to your financial institution and received EUR, and a month later to regain the necessary amount USD, while the counterparty will receive EUR from you. In practice, the exact amount would be adjusted according to the interest rate differences.


Swap is more financial instrument than investment tool, but can be used in difficult investment portfolios for currency risk hedging.



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