Definition of Plain Vanilla Currency Swap

I see this question elsewhere. People are curious why in a plain vanilla currency swap, the counterparts are paying in different currencies. I think he/she was confused by the plain vanilla interest rate swap. For plain vanilla interest rate swap, counterparts are paying each others in the same currency. But for plain vanilla currency swap, they are paying in different currencies.

Please refer to this article (end of the article):

http://minute-class.com/finance/swap/

And quoted here:

Interest Rate Swap (fixed rate payer: get paid with floating rate increases) – equivalent to selling fixed rate bond and invest in floating rate bond – To price the swap, find a fixed rate to equate the PV of the floating rate.

Currency Swap (fixed rate payer: get paid when foreign currency appreciates): equivalent to issuing bonds at currency A (e.g. domestic), exchange to currency B at spot rate, and buy bonds at currency B with the same maturity and payments

1 Comment

AnonymousJuly 25th, 2010 at 6:15 pm

still not clear what this means in actual……….. Sounds a bit confusing to me………..

Leave a comment

Your comment