A currency swap is a financial agreement between two parties to exchange principal and interest payments in different currencies. This arrangement allows each party to access funds in a foreign currency while managing their exposure to exchange rate fluctuations. Typically, the swap involves an initial exchange of currencies, followed by periodic interest payments, and a final exchange of the principal amount at the end of the contract. These swaps are often used by companies and governments to hedge against currency risk or to obtain better financing terms. Financial institutions, such as banks, facilitate these transactions, making them an essential tool in international finance.