May 26

Currency swap - 5 min. screencast

by David Harper, CFA, FRM, CIPM

FRM |

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Here is a brief illustration of a fixed-for-fixed currency swap (e.g., dollars for euros). Please note: in a plain vanilla interest rate swap, we referred to the notional because it is not exchanged (in that case, the notional is required only to compute the interest). However, in a currency swap the principal is exchanged. Also note the variations:

  • Cross-currency (fixed for floating rate on different currencies)
  • Floating for floating
  • Differential ("diff"): difference in rates on for same principal (e.g., U.S. LIBOR vs. U.K. LIBOR on same $10 million principal)

Screencast:

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