The term "swap" means to exchange or trade. In financial markets, it refers to a contract where two parties exchange financial instruments. Within the framework of these contracts, over a specified period, different interest payments and/or different currencies are exchanged between the parties. In financial markets, it is primarily observed that swap contracts are made based on currencies and interest rates.
In an interest rate swap contract, one party with a fixed interest rate borrowing exchanges interest payments with another party with a variable interest rate borrowing. In these contracts, the principal amount does not change hands in any way.
Cross-currency swap contracts are executed to mitigate the exchange rate risk between two different currencies for a certain period. It is a transaction conducted to benefit from the higher interest yield of one currency over the other. With this contract, the opportunity to switch to another currency with a higher return is provided without taking on exchange rate risk.
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