What is Currency Swap?
A currency swap is a financial agreement between two parties to exchange principal and interest payments in two different currencies for a set period, then unwind the exchange at the end. It is used to hedge long-term FX risk or to access cheaper funding in a foreign market.
How It Works
- Parties exchange notional amounts at inception at the prevailing spot rate
- Through the life of the swap, they exchange interest in their respective currencies on the agreed dates
- At maturity, the original notional amounts are re-exchanged at the original rate
- Used to fund foreign-currency assets without taking FX risk
- Can be fixed-for-fixed, fixed-for-floating, or floating-for-floating
Saudi Context
Saudi corporates with US dollar revenue (oil-linked) but local-currency funding are largely naturally hedged because of the SAR-USD peg. Currency swaps come into play for SAR/EUR, SAR/GBP, or SAR/JPY exposures — for example, when Saudi groups raise sukuk in international markets and need local-currency cash flows.
Example
A Saudi holding company issues a EUR 500M sukuk but its operations are in SAR. It enters a SAR-EUR cross-currency swap with a bank: it receives EUR (to pay sukuk holders) and pays SAR (matched to its operating cash flows). FX risk on the sukuk is fully hedged.