Interest rate swap is the exchange of interest rate payment of different nature between two parties on the basis of a nominal principal amount, that is, the interest exchange of the same currency with different interest rates. Through this swap, one party can exchange assets or liabilities with fixed interest rate for assets or liabilities with floating interest rate, and the other party will get the opposite result. The main purpose of interest rate swap is to reduce the capital cost of both parties to the transaction and make them obtain their own interest payment methods.

Currency swap refers to the swap between two debt funds with the same amount, the same term but different currencies, or the currency swap with different interest amounts.

2. Different characteristics

The advantage of interest rate swap is less risk. Because the interest rate swap does not involve the principal, the two sides only exchange interest rates, and the risk is limited to the interest payable, so the risk is relatively small; The impact is slight. This is because the interest rate swap has no influence on the financial statements of both parties, and the current accounting standards do not require the interest rate swap to be listed in the notes to the statements, so it can be kept confidential;

The cost is lower. Through communication, both sides realized their wishes and reduced the financing cost; The procedure is relatively simple, and the transaction will be closed soon. The disadvantage of interest rate swap is that there is no standardized contract like futures trading, and sometimes the other party of the swap may not be found.

The advantage of currency swap is that it can reduce financing costs, meet the wishes of both parties and avoid exchange rate risks, because the exchange rate is fixed through forward contracts. The disadvantage of this kind of swap is the same as interest rate swap, and there is also the risk of default or non-performance of the contract. If so, the other party will inevitably suffer losses due to changes in interest rates and exchange rates.

3. Different functions

The function of interest rate swap is to reduce the financing cost. For various reasons, for the same currency, different investors have different credit ratings in different financial markets, so the interest rate of financing is also different, and there is a relative comparative advantage. Interest rate swap can take advantage of this relative comparative advantage to carry out swap arbitrage to reduce financing costs.

Asset and liability management. Interest rate swap can change fixed interest rate creditor's rights into floating interest rate creditor's rights. Hedge interest rate risk. For a currency, the holders of both fixed and floating interest rates are faced with the influence of interest rate changes. For debtors with fixed interest rates, if the interest rate trend rises, their debt burden is relatively high; For debtors with floating interest rates, if the interest rate trend rises, the cost will increase.

Currency swap is a commonly used debt hedging tool, which is mainly used to control the medium and long-term exchange rate risk and convert one foreign exchange-denominated debt or asset into another, so as to avoid exchange rate risk and reduce costs. As an off-balance-sheet business, currency swap can achieve the same goal without affecting the balance sheet.

References:

Baidu encyclopedia-interest rate swap

Baidu encyclopedia-currency swap