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Currency Swaps

CFA Exam, CFA Exam Level 2, Derivatives

This lesson is part 15 of 25 in the course Derivatives Part 2
  • Currency swaps have some key differences from interest rate swaps:
    • There are two notional principal amounts;
    • Each notional is in a different currency;
    • The notionals are exchanged at the beginning of the swap and then again at the end of the swap.
    • Periodic cash flow payments are made in different currencies.
  • Currency Swap Steps:
    1. Initial exchange of notionals.
    2. Periodic exchange of coupon payments; given the different currencies, netting may not be feasible in currency swaps like it is for plain vanilla interest rate swaps.
    3. Return of notional principals at swap expiration.
  • Motivation: Because a company may have a borrowing advantage in one currency but wishes to have the debt exposure in another currency, the company may wish to enter a currency swap.
    • Example: a U.S. company with high quality credit can borrow cheaply within the U.S. The company wishes to build a factory in Colombia, but does not have the credit history to borrow at comparable rates. The company may opt to finance the project with U.S. denominated debt and enter into a currency swap to receive U.S. and pay Colombian pesos.
    • Common users of currency swaps are borrowers who wish to convert their debt into a different currency.

Swaps are can be referred to as an “exchange of borrowings” because the parties have independently borrowed financial capital and through the use of a swap have agreed to exchange the proceeds.

Series Navigation‹ Equity SwapsSwap Pricing vs. Swap Valuing ›
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In this Course

  • CFA Level 2: Derivatives Part 2 – Introduction
  • Introduction to Options
  • Synthetic Options and Rationale
  • One Period Binomial Option Pricing Model
  • Call Option Price Formula
  • Binomial Interest Rate Options Pricing
  • Black-Scholes-Merton (BSM) Option Pricing Model
  • Black-Scholes-Merton Model and the Greeks
  • Dynamic Delta Hedging & Gamma Related Issues
  • Estimating Volatility for Option Pricing
  • Put-Call Parity for Options on Forwards
  • Introduction to Swaps
  • Plain Vanilla Interest Rate Swap
  • Equity Swaps
  • Currency Swaps
  • Swap Pricing vs. Swap Valuing
  • Pricing and Valuing a Plain Vanilla Interest Rate Swap
  • Pricing and Valuing Currency Swaps
  • Pricing and Valuing Equity Swaps
  • Swaps as Theoretical Equivalents of Other Derivatives
  • Swaptions and their Valuation
  • Swap Credit Risk and Swap Spread
  • Interest Rate Derivatives – Caps and Floors
  • Credit Default Swaps (CDS)
  • Credit Derivative Trading Strategies

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