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FRM Part I · FRM Exam Part I · Swaps

Which feature most clearly distinguishes a standard fixed-for-fixed currency swap from a plain vanilla single-currency interest rate swap?

A currency swap typically involves actual exchange of principal in two different currencies at inception and again at maturity. A vanilla interest rate swap uses a purely notional principal that is never exchanged, because both legs are in the same currency, so only interest is paid or netted.

  1. APrincipal amounts in the two currencies are exchanged at the start and again at maturity, rather than being purely notionalCorrect
  2. BBoth parties always pay floating rates, so no fixed rate is ever agreed
  3. CThe swap can only be entered into on an exchange with daily margining
  4. DInterest payments are netted into a single payment in one currency on each date

Explanation

In a currency swap, the principals are in different currencies and are normally exchanged at initiation and re-exchanged at maturity at the agreed rate. In a vanilla interest rate swap the principal is notional and never changes hands. Netting of interest is not standard here, because the payments are in different currencies.

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