A small overview on fx swaps: Swaps is an agreement to exchange cash flows. So say I (Bank A) have surplus USDs and I need INR. However, Bank B is in the exact opposite situation. So Bank A can swap cash flows with bank B. I will give out the surplus USDs in exchange for INR and Bank B will do the vice versa with an agreement to swap out the cash flow at the end of the term. USDINR spot 76.00 USD Rate 0.50% INR Rate 4.00% Tenor 1 year The transaction can also be thought of in terms of buying and selling of money market instrument. So say I buy USD security, I will give out USD to you and receive interest on USD. I sell INR security and receive INR funds and pay out the interest to you. Basically, interest rate parity is a fundamental concept linking the exchange rate to the interest rate. It defines a no arbitrage condition, wherein my hedged returns are same whether I invest in a USD security and convert it to INR or invest in an INR security and convert it to USDs. F...
The specific focus of the Blog is on Global and Domestic interest rates and currencies market. I look at fundamentals to define my bias and corroborate that with a study of price action to put on high conviction trades. The views and opinions are those of author and author alone. ~ Author: Vaishali Bagchi