Please explain in simple terms. How exactly does it function?
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A bilateral currency swap line allows two central banks to immediately swap currencies directly between each other up to a specified amount. The swap allows Central Bank A to immediately buy Central Bank B's currency at the official exchange rate. The currency never leaves each Central Bank; it is just reassigned to a new owner.
Crucially, the two banks also agree that Central Bank A has to buy back its currency at the same rate plus interest at a specified future date. Central Bank B never assumes any risk for Central Bank A's newly purchased reserves and is no party to any agreements which make use of the funds.
