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, which can be beneficial for international trade or investment. The terms of the swap, including the exchange rates and payment schedules, are agreed upon at the outset. Typically, currency swaps are used by companies or governments to manage foreign exchange risk or to obtain better financing terms. By swapping currencies, they can take advantage of lower interest rates or favorable market conditions in another country, enhancing their financial flexibility.