“A swap that involves the exchange of principal and interest in one currency for the same in another currency. It is considered to be a foreign exchange transaction and is not required by law to be shown on a company’s balance sheet. For example, suppose a U.S.-based company needs to acquire Swiss francs and a Swiss-based company needs to acquire U.S. dollars. These two companies could arrange to swap currencies by establishing an interest rate, an agreed upon amount and a common maturity date for the exchange. Currency swap maturities are negotiable for at least 10 years, making them a very flexible method of foreign exchange. Currency swaps were originally done to get around exchange controls. (source: investopedia)”
Bank of England signed a currency swap deal with the People’s Bank of China at the weekend in a hope to make London a global center for trading the offshore renminbi. On the other hand, China expects that someday renminbi would rival the U.S. dollar’s dominance in global trade.