What is the role of banks in currency&interest rate swaps?
Banks play multiple roles in currency and interest rate swaps, depending on whom the swap is for and what its objectives are. These roles range from client service to proprietary trading.SwapsCurrency and interest rate swaps are financial arrangements that allow counterparties to exchange exposure or cash flow in a particular currency or interest rate instrument to better match their own assets and liabilities.Client ServiceBanks arrange the swaps for their corporate and investment clients. There is no exchange for these swaps so they are arranged over-the-counter, usually with a bank as intermediary.CounterpartiesBanks will match their client’s currency or interest rate exposure with that of another client or another bank’s client. These become the counterparties to the swap.Market MakersSometimes the banks themselves function as counterparties in a swap to make a market for client transactions.Proprietary TradingOther times banks will enter into swaps to take a position in a particul
