How does the international asset swap machanism works?

International asset swap is a way by which a country can
allow large domestic institutional investors to diversify their portfolio and gain an
exposure to foreign assets. Simultaneously, both foreign institutional investors gain
access to local assets and can add them in their portfolio. The difference between
allowing cross-border transactions in the form of asset swaps and actual sale and
purchase of assets is that the swap only results in a flow of funds across the border of
the profit/loss made, with no transfer of ownership.

Let us
assume an investment bank A based abroad and a local domestic fund B have created an
international asset swap. The asset here is an investment in equity markets. If the
local equity markets do better than the equity markets of the nation that A is based in,
B sends the net profits to A. In the opposite case, B receives funds equal to the losses
made from A.

The advantage of international asset swaps is
that there is no initial capital flow in either direction, only the net profit/loss is
exchanged at the end of a period which is specified in the contract created with the
swap.