The purpose of engaging in a currency swap is usually to procure loans in foreign currency at more favorable interest rates than if borrowing directly in a foreign market. The World Bank first introduced currency swaps in 1981 in an effort to obtain German marks and Swiss francs. This type of swap can be done on loans with maturities as long as 10 years. Currency swaps differ from interest rate swaps in that they also involve principal exchanges.

In a currency swap, each party continues to pay interest on the swapped principal amounts throughout the length of the loan. When the swap is over, principal amounts are exchanged once more at a pre-agreed rate (which would avoid transaction risk) or the spot rate.

There are two main types of currency swaps. The fixed-for-fixed currency swap involves exchanging fixed interest payments in one currency for fixed interest payments in another. In the fixed-for-floating swap, fixed interest payments in one currency are exchanged for floating interest payments in another. In the latter type of swap, the principal amount of the underlying loan is not exchanged.