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CFA Level I · CFA Level I Exam · Pricing and Valuation of Interest Rate and Other Swaps

At initiation of a fixed-for-fixed currency swap priced with no arbitrage, the swap is most likely:

A currency swap priced without arbitrage is worth zero to both counterparties at initiation. Each leg's fixed rate is set so its present value equals its notional, and at the spot rate the two legs are equal, so neither side gains or loses value at the start.

  1. Aworth zero to both counterpartiesCorrect
  2. Bworth the notional difference to the payer
  3. Cworth a positive amount to the receiver of the lower rate

Explanation

Fixed rates in each currency are set so that the present value of each leg equals its notional principal. The two legs, converted at spot, are then equal in value, so the swap is worth zero to both parties at initiation. Payers of the lower rate gain no value, because the rate gap offsets the expected currency movement.

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