A type of currency swaps which involves the exchange of principal between two currencies. In other words, under this swap the two parties will exchange only principal cash flows in two different currencies on preset dates. Investors may use a principal-only swap (POS) to hedge principal repayment both under bullet (single transaction) and staggered (multiple transactions) repayment schedule.

Furthermore, a POS can be used to change a liability (borrowing) from a higher interest-bearing currency to a lower-interest bearing currency. The cost of POS is the forward premium considered while arriving at the fixed exchange rate for repayment in future on preset dates. Forward premium is calculated on basis of difference of interest rates between two currencies, e.g. the dollar and the euro.

For example, a firm having a fixed rate liability in U.S. dollars and expecting that the USD would appreciate against the euro in the future, may want to pay a fixed amount of euro and receive a fixed amount of USD.