Although they are a relatively recent invention, currency swaps have quickly become a vital and widely used financial instrument. Given the ever-increasing globalization, understanding the potential benefits of using currency swaps is essential for any modern multinational company. Currency swapping works just as the name suggests: several national currencies are exchanged between two parties for an agreed upon period of time. Investopeia.com defines a currency swap as “two notional principals [of different currencies] that are exchanged at the beginning and end of the agreement” (Cavallaro, 2011). Typically, the reason for engaging in a currency swap with another company is because a company may have a comparative advantage in obtaining a loan in one currency, typically the national currency, even though it may want the funds to be in a foreign currency. If they can find a counterparty that also has a comparative advantage in obtaining financing in their home currency, both companies can benefit from a currency swap. To illustrate this, imagine that a well-known US-based company wants to expand its operations into Europe. Perhaps he will receive more attractive financing in the United States based on his reputation and contacts than in Europe; so the company can get a loan from a US bank at a relatively low rate and then simply exchange the dollars for euros with a European company that needs dollars and that similarly has an advantage in financing options in its home currency (McCaffrey, 2007). Another reason why a currency swap might be beneficial to a business is to protect against currency fluctuations. Consider a U.S. company that is trying to hedge some of its euro exposure by borrowing in euros; arranging a currency swap with a European country… paper medium… of deregulation and integration of national capital markets and extreme volatility of interest rates and currencies…” (Shapiro, 2006, p. 312 ) Figure 1 (Bank for International Settlements, 2007) (BANK FOR INTERNATIONAL SETTLEMENTS, 1999) (Bank for International Settlements, 2005)Works cite Cavallaro, M. (2011, June 7). Hedging with currency swaps. Retrieved September 9, 2011, from Investopedia.com: http://www.investopedia.com/articles/forex/11/hedging-with-currency-swaps.asp#axzz1XRYSf5wtMcCaffrey, M. (2007, April 27). An introduction to swaps. Retrieved September 9, 2011, from Investopedia.com: http://www.investopedia.com/articles/optioninvestor/07/swaps.asp#axzz1XP2LnDyMShapiro, A. (2006). Multinational Financial Management (8th ed.). John Wiley & Sons. Walmsle, J. (1992). Guide to Currency and Money Markets, The. New York: John Wiley & Sons, Inc.