PREFACE

In every field of
education imparted to
the student, working on
project plays an
immense role in bringing
out and exhibiting the
qualities which are
helpful in implementing
student’s knowledge in
the practical life.

When it comes to the

practical knowledge in
‘Financial field’, there
are number of areas to be
specialized in. One can
go for core finance like
working capital
management, Investment
decisions; capital
structure decisions,
credit policies etc, and
one can look forward to
equity and Forex
markets as well. Both are
important part of the
Finance. But amongst all
these fields’ tremendous opportunities are residing in the Foreign Exchange and Currency
Derivatives in India.

The foreign exchange market directly impacts every bond, equity, private property,
manufacturing asset and any investments accessible to foreign investors. Foreign exchange
rates play a major role in financing government deficits, equity ownership in companies and
real-estate holdings. Foreign exchange trading helps determine who hires and fires
employees, and who owns the banks at which you maintain your corporate and personal
accounts. The currency in your pocket is literally stock in your country, and like a share, its
value fluctuates on the international market providing knowledgeable traders with substantial
opportunities for profit or loss.
Getting the deep and practical knowledge of this field can be of great help to the students
who are interested in finance. This kind of training and projects can help the students to use
their theoretical knowledge on the practical aspects of the field.
Derivatives:
A derivative is a financial instrument that is derived from some other asset, index, event,
value or condition (known as the underlying asset). Rather than trade or exchange the
underlying asset itself, derivative traders enter into an agreement to exchange cash or assets
over time based on the underlying asset. A simple example is a futures contract: an agreement
to exchange the underlying asset at a future date.

Derivatives are often highly leveraged, such that a small movement in the underlying value
can cause a large difference in the value of the derivative.

Derivatives can be used by investors to speculate and to make a profit if the value of the
underlying asset moves the way they expect (e.g. moves in a given direction, stays in or out
of a specified range, reaches a certain level). Alternatively, traders can use derivatives
to hedge or mitigate risk in the underlying, by entering into a derivative contract whose value
moves in the opposite direction to their underlying position and cancels part or all of it out.

Derivatives are usually broadly categorised by:

 The relationship between the underlying and the derivative

(e.g. forward, option, swap)
 The type of underlying (e.g. freight derivatives based on Baltic Exchange shipping
indices), equity derivatives, foreign exchange derivatives, interest rate derivative, and
credit derivatives)
 The market in which they trade (e.g., exchange traded or over-the-counter)

Uses of Derivatives

Hedging
Hedging is a technique designed to eliminate or reduce risk.

Derivatives allow risk about the price of the underlying asset to be transferred from one party
to another. For example, a wheat farmer and a miller could sign a futures contract to
exchange a specified amount of cash for a specified amount of wheat in the future. Both
parties have reduced a future risk: for the wheat farmer, the uncertainty of the price, and for
the miller, the availability of wheat. However, there is still the risk that no wheat will be
available because of events unspecified by the contract, like the weather, or that one party
will renege on the contract. Although a third party, called a clearing house, insures a futures
contract, not all derivatives are insured against counterparty risk.

From another perspective, the farmer and the miller both reduce a risk and acquire a risk
when they sign the futures contract: The farmer reduces the risk that the price of wheat will
fall below the price specified in the contract and acquires the risk that the price of wheat will
rise above the price specified in the contract (thereby losing additional income that he could
have earned). The miller, on the other hand, acquires the risk that the price of wheat will fall
below the price specified in the contract (thereby paying more in the future than he otherwise
would) and reduces the risk that the price of wheat will rise above the price specified in the
contract. In this sense, one party is the insurer (risk taker) for one type of risk, and the
counterparty is the insurer (risk taker) for another type of risk.

Hedging also occurs when an individual or institution buys an asset (like a commodity, a
bond that has coupon payments, a stock that pays dividends, and so on) and sells it using a
futures contract. The individual or institution has access to the asset for a specified amount of
time, and then can sell it in the future at a specified price according to the futures contract. Of
course, this allows the individual or institution the benefit of holding the asset while reducing
the risk that the future selling price will deviate unexpectedly from the market's current
assessment of the future value of the asset.
Derivatives serve a legitimate business purpose. For example a corporation borrows a large
sum of money at a specific interest rate. The rate of interest on the loan resets every six
months. The corporation is concerned that the rate of interest may be much higher in six
months. The corporation could buy a forward rate agreement (FRA). A forward rate
agreement is a contract to pay a fixed rate of interest six months after purchases on a notional
sum of money. If the interest rate after six months is above the contract rate the seller pays
the difference to the corporation, or FRA buyer. If the rate is lower the corporation would pay
the difference to the seller. The purchase of the FRA would serve to reduce the uncertainty
concerning the rate increase and stabilize earnings

Speculation and Arbitrage

Derivatives can be used to acquire risk, rather than to insure or hedge against risk. Thus,
some individuals and institutions will enter into a derivative contract to speculate on the value
of the underlying asset, betting that the party seeking insurance will be wrong about the
future value of the underlying asset. Speculators will want to be able to buy an asset in the
future at a low price according to a derivative contract when the future market price is high,
or to sell an asset in the future at a high price according to a derivative contract when the
future market price is low.

Individuals and institutions may also look for arbitrage opportunities, as when the current
buying price of an asset falls below the price specified in a futures contract to sell the asset.

Speculative trading in derivatives gained a great deal of notoriety in 1995 when Nick Leeson,

a trader at Barings Bank, made poor and unauthorized investments in futures contracts.
Through a combination of poor judgment, lack of oversight by the bank's management and by
regulators, and unfortunate events like the Kobe earthquake, Leeson incurred a $1.3 billion
loss that bankrupted the centuries-old institution.[3]

Types of derivatives

OTC and exchange-traded

Broadly speaking there are two distinct groups of derivative contracts, which are
distinguished by the way they are traded in the market:

 Over-the-counter (OTC) derivatives are contracts that are traded (and privately

negotiated) directly between two parties, without going through an exchange or other
intermediary. Products such as swaps, forward rate agreements, and exotic options are
almost always traded in this way. The OTC derivative market is the largest market for
derivatives, and is largely unregulated with respect to disclosure of information between
the parties, since the OTC market is made up of banks and other highly sophisticated
parties, such as hedge funds. Reporting of OTC amounts are difficult because trades can
 occur in private, without activity being visible on any exchange. According to the Bank
for International Settlements, the total outstanding notional amount is $684 trillion (as of
June 2008). Of this total notional amount, 67% are interest rate contracts, 8% are credit
default swaps (CDS), 9% are foreign exchange contracts, 2% are commodity contracts,
1% are equity contracts, and 12% are other. Because OTC derivatives are not traded on
an exchange, there is no central counterparty. Therefore, they are subject
to counterparty risk, like an ordinary contract, since each counterparty relies on the other
to perform.

 Exchange-traded derivatives (ETD) are those derivatives products that are traded via
specialized derivatives exchanges or other exchanges. A derivatives exchange acts as an
intermediary to all related transactions, and takes Initial margin from both sides of the
trade to act as a guarantee. The world's largest derivatives exchanges are the Korea
Exchange (which lists KOSPI Index Futures & Options), Eurex (which lists a wide range
of European products such as interest rate & index products), and CME Group (made up
of the 2007 merger of the Chicago Mercantile Exchange and the Chicago Board of
Trade and the 2008 acquisition of the New York Mercantile Exchange). According to
BIS, the combined turnover in the world's derivatives exchanges totaled USD 344 trillion
during Q4 2005. Some types of derivative instruments also may trade on traditional
exchanges. For instance, hybrid instruments such as convertible bonds and/or convertible
preferred may be listed on stock or bond exchanges. Also, warrants (or "rights") may be
listed on equity exchanges. Performance Rights, Cash xPRTs and various other
instruments that essentially consist of a complex set of options bundled into a simple
package are routinely listed on equity exchanges. Like other derivatives, these publicly
traded derivatives provide investors access to risk/reward and volatility characteristics
that, while related to an underlying commodity, nonetheless are distinctive.

Common Derivative Contract Types

There are three major classes of derivatives:

1. Futures/Forwards are contracts to buy or sell an asset on or before a future date at a

price specified today. A futures contract differs from a forward contract in that the
futures contract is a standardized contract written by a clearing house that operates an
exchange where the contract can be bought and sold, while a forward contract is a
non-standardized contract written by the parties themselves.
2. Options are contracts that give the owner the right, but not the obligation, to buy (in
the case of a call option) or sell (in the case of a put option) an asset. The price at
which the sale takes place is known as the strike price, and is specified at the time the
 parties enter into the option. The option contract also specifies a maturity date. In the
case of a European option, the owner has the right to require the sale to take place on
(but not before) the maturity date; in the case of an American option, the owner can
require the sale to take place at any time up to the maturity date. If the owner of the
contract exercises this right, the counterparty has the obligation to carry out the
transaction.
3. Swaps are contracts to exchange cash (flows) on or before a specified future date
based on the underlying value of currencies/exchange rates, bonds/interest rates,
commodities, stocks or other assets.

Cash flow

The payments between the parties may be determined by:

 The price of some other, independently traded asset in the future (e.g., a common
stock);
 The level of an independently determined index (e.g., a stock market index or heating-
degree-days);
 The occurrence of some well-specified event (e.g., a company defaulting);
 An interest rate;
 An exchange rate;
 Or some other factor.
Some derivatives are the right to buy or sell the underlying security or commodity at some
point in the future for a predetermined price. If the price of the underlying security or
commodity moves into the right direction, the owner of the derivative makes money;
otherwise, they lose money or the derivative becomes worthless. Depending on the terms of
the contract, the potential gain or loss on a derivative can be much higher than if they had
traded the underlying security or commodity directly.

Criticisms

Derivatives are often subject to the following criticisms:

Possible large losses
The use of derivatives can result in large losses because of the use of leverage, or borrowing.
Derivatives allow investors to earn large returns from small movements in the underlying
asset's price. However, investors could lose large amounts if the price of the underlying
moves against them significantly. There have been several instances of massive losses in
derivative markets, such as:
  The need to recapitalize insurer American International Group (AIG) with $85
billion of debt provided by the US federal government.[10] An AIG subsidiary had
lost more than $18 billion over the preceding three quarters on Credit Default
Swaps (CDS) it had written.[11] It was reported that the recapitalization was
necessary because further losses were foreseeable over the next few quarters.
 The loss of $7.2 Billion by Société Générale in January 2008 through mis-use of
futures contracts.
 The loss of US$6.4 billion in the failed fund Amaranth Advisors, which was long
natural gas in September 2006 when the price plummeted.

Counter-party risk
Derivatives (especially swaps) expose investors to counter-party risk.

For example, suppose a person wanting a fixed interest rate loan for his business, but
finding that banks only offer variable rates, swaps payments with another business who
wants a variable rate, synthetically creating a fixed rate for the person. However if the
second business goes bankrupt, it can't pay its variable rate and so the first business will
lose its fixed rate and will be paying a variable rate again. If interest rates have
increased, it is possible that the first business may be adversely affected, because it may
not be prepared to pay the higher variable rate.

Different types of derivatives have different levels of risk for this effect. For example,
standardized stock options by law require the party at risk to have a certain amount
deposited with the exchange, showing that they can pay for any losses; Banks who help
businesses swap variable for fixed rates on loans may do credit checks on both parties.
However in private agreements between two companies, for example, there may not be
benchmarks for performing due diligence and risk analysis.

Unsuitably high risk for small/inexperienced investors

Derivatives pose unsuitably high amounts of risk for small or inexperienced investors.
Because derivatives offer the possibility of large rewards, they offer an attraction even to
individual investors. However, speculation in derivatives often assumes a great deal of
risk, requiring commensurate experience and market knowledge, especially for the small
investor, a reason why some financial planners advise against the use of these
instruments. Derivatives are complex instruments devised as a form of insurance, to
transfer risk among parties based on their willingness to assume additional risk, or hedge
against it.

Large notional value

 Derivatives typically have a large notional value. As such, there is the danger that their
use could result in losses that the investor would be unable to compensate for. The
possibility that this could lead to a chain reaction ensuing in an economic crisis, has been
pointed out by famed investor Warren Buffett in Berkshire Hathaway's 2002 annual
report. Buffett called them 'financial weapons of mass destruction.' The problem with
derivatives is that they control an increasingly larger notional amount of assets and this
may lead to distortions in the real capital and equities markets. Investors begin to look at
the derivatives markets to make a decision to buy or sell securities and so what was
originally meant to be a market to transfer risk now becomes a leading indicator.

Leverage of an economy's debt

Derivatives massively leverage the debt in an economy, making it ever more difficult for
the underlying real economy to service its debt obligations, thereby curtailing real
economic activity, which can cause a recession or even depression.

Benefits

Nevertheless, the use of derivatives also has its benefits:

 Derivatives facilitate the buying and selling of risk, and many people consider this to
have a positive impact on the economic system. Although someone loses money
while someone else gains money with a derivative, under normal circumstances,
trading in derivatives should not adversely affect the economic system because it is
not zero sum in utility.
 Former Federal Reserve Board chairman Alan Greenspan commented in 2003 that he
believed that the use of derivatives has softened the impact of the economic
downturn at the beginning of the 21st century.

INTEREST RATE RISK

Interest rate risk is the risk borne by an interest-bearing asset, such as a loan or a bond, due to
variability of interest rates. In general, as rates rise, the price of a fixed rate bond will fall, and
vice versa. Interest rate risk is commonly measured by the bond's duration.
Forwad Rate Agreement:

A forward rate agreement (FRA) is a forward contract in which one party pays a fixed
interest rate, and receives a floating interest rate equal to a reference
rate (the underlying rate). The payments are calculated over a notional amount over a certain
period, and netted; i.e. only the differential is paid. It is paid on the effective date. The
reference rate is fixed one or two days before the effective date, dependent on the market
convention for the particular currency. FRAs are over-the counter derivatives. A swap is a
combination of FRAs.

Many banks and large corporations will use FRAs to hedge future interest rate exposure. The
buyer hedges against the risk of rising interest rates, while the seller hedges against the risk of
falling interest rates. Other parties that use Forward Rate Agreements are speculators purely
looking to make bets on future directional changes in interest rates.[citation needed]

The payer of the fixed interest rate is also known as the borrower or the buyer, whilst the
receiver of the fixed interest rate is the lender or the seller.

Interest Rate Futures:

An Interest Rate Future is a financial derivative with an interest-bearing instrument as the

underlying asset.

Interest rate futures are used to hedge against the risk of that interest rates will move in an
adverse direction, causing a cost to the company.

For example, borrowers face the risk of interest rates rising. Futures use the inverse
relationship between interest rates and bond prices to hedge against the risk of rising interest
rates. A borrower will enter to sell a future today. Then if interest rates rise in the future, the
value of the future will fall, and hence a profit can be made when closing out of the future.

Interest Rate Options:

Interest Rate Swaps:

An interest rate swap is a derivative in which one party exchanges a stream

of interest payments for another party's stream of cash flows. Interest rate swaps can be used
by hedgers to manage their fixed or floating assets and liabilities. Unlike corporate bonds,
interest rate swaps do not involve risk on the principal amount. They can also be used by
speculators to replicate unfunded bond exposures to profit from changes in interest rates.
Interest rate swaps are very popular and highly liquid instruments.

In an interest rate swap, each counterparty agrees to pay either a fixed or floating rate

denominated in a particular currency to the other counterparty. The fixed or floating rate is
multiplied by a notional principal amount . This notional amount is generally not exchanged
between counterparties, but is used only for calculating the size of cashflows to be
exchanged.

Types of Interest Rate Swaps:

Fixed-for-floating rate swap, same currency:

Party B pays/receives fixed interest in currency A to receive/pay floating rate in currency A
indexed to X on a notional amount N for a term of T years. Fixed-for-floating swaps in same
currency are used to convert a fixed rate asset/liability to a floating rate asset/liability or vice
versa.

Fixed-for-floating rate swap, different currencies

Party P pays/receives fixed interest in currency A to receive/pay floating rate in currency B
indexed to X on a notional N at an initial exchange rate of FX for a tenure of T years. Fixed-
for-floating swaps in different currencies are used to convert a fixed rate asset/liability in one
currency to a floating rate asset/liability in a different currency, or vice versa.

Floating-for-floating rate swap, same currency

Party P pays/receives floating interest in currency A Indexed to X to receive/pay floating rate
in currency A indexed to Y on a notional N for a tenure of T years. Floating-for-floating rate
swaps are used to hedge against or speculate on the spread between the two indexes widening
or narrowing. Floating-for-floating rate swaps are also seen where both sides reference the
same index, but on different payment dates, or use different business day conventions. These
have almost no use for speculation, but can be vital for asset-liability management.

Fixed-for-fixed rate swap, different currencies

Party P pays/receives fixed interest in currency A to receive/pay fixed rate in currency B for a
term of T years.
CURRENCY RISK

Currency risk is a form of risk that arises from the change in price of one currency against
another. Whenever investors or companies have assets or business operations across national
borders, they face currency risk if their positions are not hedged.

 Transaction risk is the risk that exchange rates will change unfavourably over time. It
can be hedged against using forward currency contracts;
 Translation risk is an accounting risk, proportional to the amount of assets held in
foreign currencies. Changes in the exchange rate over time will render a report inaccurate,
and so assets are usually balanced by borrowings in that currency.
The exchange risk associated with a foreign denominated instrument is a key element in
foreign investment. This risk flows from differential monetary policy and growth in real
productivity, which results in differential inflation rates.

For example if you are a U.S. investor and you have stocks in Canada, the return that you will
realize is affected by both the change in the price of the stocks and the change of the
Canadian dollar against the U.S. dollar. Suppose that you realized a return in the stocks of
15% but if the Canadian dollar depreciated 15% against the U.S. dollar, you would make a
small loss.

When a firm conducts transactions in different currencies, it exposes itself to risk. The risk
arises because currencies may move in relation to each other. If a firm is buying and selling
in different currencies, then revenue and costs can move upwards or downwards as exchange
rates between currencies change. If a firm has borrowed funds in a different currency, the
repayments on the debt could change or, if the firm has invested overseas, the returns on
investment may alter with exchange rate movements — this is usually known as foreign
currency exposure.

Currency risk exists regardless of whether you are investing domestically or abroad. If you
invest in your home country, and your home currency devalues, you have lost money. Any
and all stock market investments are subject to currency risk, regardless of the nationality of
the investor or the investment, and whether they are the same or different. The only way to
avoid currency risk is to invest in commodities, which hold value independent of any
monetary system.

Forward Contract: 

A forward contract or simply a forward is an agreement between two parties to buy or sell an
asset at a certain future time for a certain price agreed today. This is in contrast to a spot
contract, which is an agreement to buy or sell an asset today. It costs nothing to enter a
forward contract. The party agreeing to buy the underlying asset in the future assumes a long
position, and the party agreeing to sell the asset in the future assumes a short position. The
price agreed upon is called the delivery price, which is equal to the forward price at the time
the contract is entered into.

The price of the underlying instrument, in whatever form, is paid before control of the
instrument changes. This is one of the many forms of buy/sell orders where the time of trade
is not the time where the securities themselves are exchanged.

The forward price of such a contract is commonly contrasted with the spot price, which is the
price at which the asset changes hands on the spot date. The difference between the spot and
the forward price is the forward premium or forward discount, generally considered in the
form of a profit, or loss, by the purchasing party.
Forwards, like other derivative securities, can be used to hedge risk (typically currency or
exchange rate risk), as a means of speculation, or to allow a party to take advantage of a
quality of the underlying instrument which is time-sensitive.

A closely related contract is a futures contract; they differ in certain respects. Forward

contracts are very similar to futures contracts, except they are not exchange traded, or defined
on standardized assets. Forwards also typically have no interim partial settlements or "true-
ups" in margin requirements like futures - such that the parties do not exchange additional
property securing the party at gain and the entire unrealized gain or loss builds up while the
contract is open. However, being traded OTC, forward contracts specification can be
customized and may include mark-to-market and daily margining. Hence, a forward contract
arrangement might call for the loss party to pledge collateral or additional collateral to better
secure the party at gain.

Currency Options:

A currency option is no different from a stock option except that the underlying asset is
foreign exchange. The basic premises remain the same: the buyer of option has the right but
no obligation to enter into a contract with the seller. Therefore the buyer of a currency option
has the right, to his advantage, to enter into the specified contract.
In every currency transaction, one currency is bought and another sold. For example an
option to buy US dollars (USD) for Indian rupees (INR) is an USD call and an INR put.
Conversely, an option to sell USD for INR is an USD put and an INR call. The other basics
like strike price, expiration period, American style or European style are similar to stock
options.
Quotation of a currency option can be done in two ways: American or direct terms, in which
a currency is quoted in terms of the Indian Rupees per unit of foreign currency; and European
or inverse terms, in which the Rupee is quoted in terms of units of foreign currency per rupee.
The same applies to situations where the Indian Rupee is not one of the currencies.

Option Pricing
The premium quoted for a particular option at a particular time represents a consensus of the
option's current value which is comprised of two elements: intrinsic value and time value.
Intrinsic value is simply the difference between the spot price and the strike price. A put
option will have intrinsic value only when the spot price is below the strike price. A call
option will have intrinsic value only when the spot price is above the strike price. Options,
which have positive intrinsic value, are said to be "in-the-money".

When the price of a call or put option is greater than its intrinsic value, it is because of its
time value. Time value is determined by five variables: the spot or underlying price, the
expected volatility of the underlying currency, the exercise price, time to expiration, and the
difference in the "risk-free" rate of interest that can be earned by the two currencies. Time
value falls toward zero as the expiration date approaches. An option is said to be "out-of-the-
money" if its price is comprised only of time value. A variety of complex option pricing
models such as Black-Scholes and Cox-Rubinstein have been developed to determine option
pricing. Another commonly used model for currency option valuation is the Garmen-
Kohlhagen model.

Interest rate differentials between nations and temporary supply/demand imbalances can also
have an effect on option premiums. In the final analysis, option prices (premiums) must be
low enough to induce potential buyers to buy and high enough to induce potential option
writers to sell.
Types of Options
Apart from the normal call and put the following are a few basic types of currency options. In
real life most of the options are combinations of these basic types.
Knock-Out Options These are like standard options except that they extinguish or cease to
exist if the underlying market reaches a pre-determined level during the life of the option.
The knockout component generally makes them cheaper than a standard Call or Put.
Knock-in Options These options are the reverse of knockout options because they don't
come into existence until the underlying market reaches a certain pre-determined level, at this
time a Call or Put option comes into life and takes on all the usual characteristics.
Average Rate Options The options have their strikes determined by an averaging process,
for example at the end of every month. The profit or loss is determined by the difference
between the calculated strike and the underlying market at expiry.
Basket Options A basket option has all the characteristics of a standard option, except that
the strike price is based on the weighted value of the component currencies, calculated in the
buyer's base currency. The buyer stipulates the maturity of the option, the foreign currency
amounts which make up the basket, and the strike price, which is expressed in units of the
base currency.

Currency Future:
A currency future, also FX future or foreign exchange future, is a futures contract to
exchange one currency for another at a specified date in the future at a price (exchange rate)
that is fixed on the purchase date; see Foreign exchange derivative. Typically, one of the
currencies is the US dollar. The price of a future is then in terms of US dollars per unit of
other currency. This can be different from the standard way of quoting in the spot foreign
exchange markets. The trade unit of each contract is then a certain amount of other currency,
for instance €125,000. Most contracts have physical delivery, so for those held at the end of
the last trading day, actual payments are made in each currency. However, most contracts are
closed out before that. Investors can close out the contract at any time prior to the contract's
delivery date.

Uses

Hedging:
Investors use these futures contracts to hedge against foreign exchange risk. If an investor
will receive a cashflow denominated in a foreign currency on some future date, that investor
can lock in the current exchange rate by entering into an offsetting currency futures position
that expires on the date of the cashflow.

Speculation:
Currency futures can also be used to speculate and, by incurring a risk, attempt to profit from
rising or falling exchange rates.

Currency Swaps:

A currency swap is a foreign-exchange agreement between two parties to exchange aspects of

a loan in one currency for equivalent aspects of an equal in net present value loan in another
currency; see Foreign exchange derivative. Currency swaps are motivated by comparative
advantage. A currency swap should be distinguished from a central bank liquidity swap.

Currency swaps are over-the-counter derivatives, and are closely related to interest rate

swaps. However, unlike interest rate swaps, currency swaps can involve the exchange of the
principal.

There are three different ways in which currency swaps can exchange loans:

The most simple currency swap structure is to exchange the principal only with
the counterparty, at a rate agreed now, at some specified point in the future. Such an
agreement performs a function equivalent to a forward contract or futures. The cost of finding
a counterparty (either directly or through an intermediary), and drawing up an agreement with
them, makes swaps more expensive than alternative derivatives (and thus rarely used) as a
method to fix shorter term forward exchange rates. However for the longer term future,
commonly up to 10 years, where spreads are wider for alternative derivatives, principal-only
currency swaps are often used as a cost-effective way to fix forward rates. This type of
currency swap is also known as an FX-swap.

Another currency swap structure is to combine the exchange of loan principal, as above, with
an interest rate swap. In such a swap, interest cash flows are not netted before they are paid to
the counterparty (as they would be in a vanilla interest rate swap) because they are
denominated in different currencies. As each party effectively borrows on the other's behalf,
this type of swap is also known as a back-to-back loan.

Last here, but certainly not least important, is to swap only interest payment cash flows on
loans of the same size and term. Again, as this is a currency swap, the exchanged cash flows
are in different denominations and so are not netted. An example of such a swap is the
exchange of fixed-rate US Dollar interest payments for floating-rate interest payments in
Euro. This type of swap is also known as a cross-currency interest rate swap, or cross-
currency swap.

Currency swaps have two main uses:

 To secure cheaper debt (by borrowing at the best available rate regardless of currency
and then swapping for debt in desired currency using a back-to-back-loan).
 To hedge against (reduce exposure to) exchange rate fluctuations.

I didn’t get d foll info:

Invoicing in foreign currency, currency borrowings, currency options,