CMFAS CM-SIP Swaps & Other OTC Derivatives question: exchanged in a currency swap

CMFAS CM-SIPSwaps & Other OTC Derivatives

Why are principal amounts usually exchanged in a currency swap but not in an interest-rate swap?

A Because currency swaps are exchange-traded and the exchange requires full delivery of principal
B Because interest-rate swaps have no notional, only a fixed and a floating rate
C Because the legs are in two currencies, so principals fund the interest streams and hedge FX risk
D Because currency swaps carry no counterparty risk once principal has been exchanged

Show the answer and explanation

Answer: C. Because the legs are in two currencies, so principals fund the interest streams and hedge FX risk

In a currency swap the legs are in different currencies, so principals are exchanged to fund the interest streams and hedge the FX exposure; an IRS keeps both legs in one currency and exchanges no principal.

Common mistake

Not linking the principal exchange to the two-currency structure of the swap.

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CMFAS CM-SIP Swaps & Other OTC Derivatives question: exchanged in a currency swap

Answer: C. Because the legs are in two currencies, so principals fund the interest streams and hedge FX risk

Common mistake

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CMFAS CM-SIP Swaps & Other OTC Derivatives question: exchanged in a currency swap

Answer: C. Because the legs are in two currencies, so principals fund the interest streams and hedge FX risk

Common mistake

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