What does a currency swap primarily facilitate?

A currency swap primarily facilitates the exchange of currency interest payments between two parties. In a typical currency swap arrangement, two participants agree to exchange principal amounts, usually in different currencies, and also make periodic interest payments to each other, which are calculated based on the respective interest rates associated with the currencies involved. This is particularly beneficial for entities that have liabilities in different currencies and wish to manage their exposure to currency fluctuations or reduce borrowing costs.

The primary focus on interest payments in a currency swap illustrates its utility in enabling participants to take advantage of better interest rates in the home currency of the other party, thereby optimizing their financial positions. In this way, the currency swap serves as a risk management tool, addressing both currency and interest rate risks simultaneously through interest payment exchanges, along with the initial and final principal exchanges.