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

Two years after initiation, the foreign currency has appreciated against the domestic currency. A domestic-currency party in a fixed-for-fixed currency swap is receiving the foreign currency fixed payments and the foreign notional at maturity. Holding interest rates constant, the swap's value to this party has most likely:

The swap value has most likely increased. The party receives foreign-currency flows, and a stronger foreign currency raises their domestic value, while the domestic payments the party owes are unchanged. Fixed rates do not protect the value from exchange-rate moves.

  1. Adecreased, because the foreign leg is worth less in domestic terms
  2. Bincreased, because the foreign leg is worth more in domestic termsCorrect
  3. Cremained unchanged, because the fixed rates were set at initiation

Explanation

The party receives foreign currency cash flows. If the foreign currency appreciates, their domestic value rises while the domestic leg being paid is unchanged, so swap value rises. The unchanged option ignores that the legs are in different currencies.

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