Two countries meet, with their central banks....drawing up a 'swap' deal....usually with a period of effort, and amount.
At the start, the two parties exchange equivalent amounts of principal in different currencies, based on the prevailing spot exchange rate. For example, Party A might give $10,000 USD to Party B (Argentina), while Party B gives 14-million Arg-Pesos to Party A (assuming an exchange rate of 1 USD = 1,400 Pesos).
Yeah, if you were wondering.....1,400 Pesos to the dollar is pretty high rate. Back in 2022...it was around 400 Pesos to the dollar.
During the swap term, the parties exchange interest payments on the borrowed principal, each in the currency they received. These payments can be fixed or floating, depending on the agreement.
At maturity? At the end of the swap term, the parties re-exchange the original principal amounts at the same exchange rate agreed upon initially (or a pre-set rate). This ensures neither party is exposed to exchange rate risk on the principal at maturity.
Having reviewed US use since 1990.....there are NO failures. Of the 47 efforts....a couple were break-even cases....no losses, no profits. But around 80-plus-percent were profitable.
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