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ACCA Strategic Professional · Advanced Financial Management · Management of international trade and finance

Which statement about a currency swap is correct?

A currency swap exchanges principal amounts at the start and re-exchanges them at maturity at the original rate, with periodic interest paid in each currency. It is over the counter, so counterparty risk remains.

  1. AIt involves an exchange of principal at the start and re-exchange at maturity at the original spot rate, with periodic interest payments in each currencyCorrect
  2. BIt involves only one exchange of net interest and never any principal
  3. CIt is an exchange-traded standardised contract with daily margining
  4. DIt removes counterparty risk because principal amounts are netted

Explanation

A currency swap typically exchanges principal at the outset and re-exchanges at the same rate at maturity, while interest is paid in each currency. Interest-only netting describes an interest rate swap. Swaps are OTC, so counterparty risk remains.

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