To understand the mechanism behind currency trading contracts, consider the following example. Company A is an American company that plans to expand its activities in Europe. Company A needs 850,000 euros to finance its European expansion. Last November, the RBI decided, with the agreement of the Indian government, to put in place a revised framework for the currency exchange agreement for ASAC 2019-2022 countries to improve financial stability and economic cooperation within the ASARC region. The bilateral currency exchange agreement will also increase India`s foreign exchange reserves (FOREX). India`s FOREX reserves have fallen since the peak of $426.08 billion in April 2018. This is because the RBI has sold reserves of U.S. dollars to limit the depreciation of rupees. With the Swea-exchange agreement, India will have an additional $75 billion in foreign capital whenever it takes. It will reduce the costs of accessing foreign capital. A currency swea is an agreement whereby two parties exchange the principal of a loan and interest in one currency for principal and interest in another currency.

The British Petroleum Company issues 5-year bonds worth $100 million, which pay 7.5% interest. It will then donate the $100 million to the swap bank, which it will pass on to the U.S. Piper Company to finance the construction of its British distribution centre. Piper Company will issue 5-year bonds valued at $150 million, which pay 10% interest. Piper Will then pass on the $150 million for the exchange of the bank, which it will pass on to the British Petroleum Company, which will use the funds to finance the construction of its U.S. refinery. Currency swaps were originally designed in the 1970s to circumvent exchange controls in the United Kingdom. At the time, British companies had to pay a premium to borrow in U.S.

dollars. To avoid this, British companies enter into back-to-back loan agreements with US companies that want to borrow Sterling. [8] Although such restrictions on currency change have become rare, comparative advantages continue to save back-to-back loans. In the 1990s, Goldman Sachs and other U.S. banks offered currency swps and loans to Mexico, which used Mexican oil reserves as collateral and payment. A currency swea is a transaction in which two parties exchange a corresponding amount of money, but in different currencies. Essentially, the parties lend each other money and will repay the amounts at a date and exchange rate. The objective could be to hedge the risk of foreign exchange risk, to speculate on the direction of a currency or to reduce the cost of borrowing in a foreign currency.