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ACCA Strategic Professional · Advanced Financial Management · The use of financial derivatives to hedge against forex risk

Which statement about a currency swap, compared with a series of forward contracts for the same currency pair, is correct?

A currency swap can hedge exchange rate exposure over long periods, often longer than forward contracts are readily available. It does not remove counterparty risk, normally involves principal exchanges, and deals with currency as well as interest exposure.

  1. AA currency swap can hedge exchange risk over long periods, often beyond the maturity usually available for forwardsCorrect
  2. BA currency swap always eliminates counterparty default risk
  3. CA currency swap involves no exchange of principal at any time
  4. DA currency swap hedges only interest rate risk, never currency risk

Explanation

Currency swaps are commonly used for long-term hedging, often for several years, where forward contracts are unavailable or illiquid. Counterparty risk remains, principal is usually exchanged at the start and end, and swaps hedge currency exposure as well as interest costs.

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