Currency Swap

Plain Vanilla Currency Swap

1. Need 2 notional principals, one in each currency
2. Interest payment not settled in net
3. Floating-rate cash flow: USD
4. Fixed-rate cash flow: other currency

Exchange notional principals at the beginning of the swap.

At maturity, notional principals are paid back.

Remember to add dealers in the cash flow triangle.

Currency swap helps firms to borrow at lower cost in foreign currencies.

Currency Swap without notional Principals:

-       This is to fix the exchange rate purchase at a fixed rate

-       Swap rates are the interest rates used in the calculations

-       First find the NP by assuming the required cash flow is interest using domestic swap rate. Then find the foreign NP by using the current exchange rate and then use the foreign swap rate to find the corresponding exchange cash flow.