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

At initiation of a plain-vanilla currency swap in which the two parties exchange notional principal at the start and again at maturity, the swap's value to each party is most likely:

The swap value at initiation is most likely zero. Fixed rates are set so the present value of the payments in one currency, converted at the spot exchange rate, equals the present value of the payments in the other currency. Because the two legs are equal, neither party gains or loses at inception.

  1. Azero, because the present values of the two legs are equalCorrect
  2. Bpositive to the party paying the lower interest rate
  3. Cnegative to the party receiving the higher-rate currency

Explanation

A currency swap is priced at initiation so that the present value of the payments in one currency, converted at the spot rate, equals the present value of the payments in the other currency. Neither party pays to enter, so the value is zero. The other options assume one side has a built-in advantage, which fair pricing removes.

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