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FRM Part I · FRM Exam Part I · Introduction to Derivatives

Which of the following is a key difference between a currency swap and a plain vanilla interest rate swap?

A currency swap typically exchanges principal in the two currencies at initiation and re-exchanges it at maturity, usually at the same exchange rate. A plain vanilla interest rate swap uses a single currency, so its notional is only a reference amount and is not exchanged.

  1. AA currency swap has no credit risk because principal amounts are fixed
  2. BA currency swap typically involves exchanging principal in the two currencies at inception and maturityCorrect
  3. CA currency swap can only be fixed-for-fixed
  4. DA currency swap does not use a notional amount

Explanation

Because the two legs are in different currencies, principal amounts are normally exchanged at the start and re-exchanged at maturity at the same rate. Currency swaps can also be fixed-for-floating or floating-for-floating, and they do carry credit risk.

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