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FRM Part I · FRM Exam Part I · Foreign Exchange Markets

Which statement about a cross-currency swap versus an interest rate swap is correct?

Cross-currency swaps typically exchange principal in the two currencies at inception and maturity, whereas plain vanilla interest rate swaps do not, since both legs share one currency and the notional is only a reference amount for calculating interest.

  1. ACross-currency swaps typically involve exchange of principal, while plain vanilla interest rate swaps do notCorrect
  2. BInterest rate swaps exchange principal at maturity, while cross-currency swaps never do
  3. CBoth exchange notional principal at inception and maturity
  4. DNeither is exposed to exchange rate movements in later cash flows

Explanation

Because the notionals are in different currencies, cross-currency swaps normally exchange principal at start and end. Plain vanilla interest rate swaps use a single currency, so notional is not exchanged. The other options misstate this or ignore FX exposure.

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