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ACCA Applied Skills · Financial Management · Hedging techniques for foreign currency risk

Which statement about a currency swap is correct?

A currency swap exchanges principal in two currencies at the start, swaps interest payments during the term, and re-exchanges the principal at maturity at the original rate. This differs from interest rate swaps, which exchange only interest, and from options, which carry no obligation.

  1. AIt involves exchanging principal amounts at the start and re-exchanging them at maturity, with interest payments in each currency in betweenCorrect
  2. BIt gives the holder the right but not the obligation to exchange currencies at a fixed rate on a future date
  3. CIt is a standardised exchange-traded contract with fixed contract sizes and settlement dates
  4. DIt exchanges only the interest payments, with no exchange of principal at any point

Explanation

A currency swap typically exchanges principal at the spot rate at the start, interest payments during the term, and re-exchange of principal at the same rate at maturity. The right-but-not-obligation description is an option. Exchange-traded standard contracts describe futures. Interest-only exchange describes an interest rate swap.

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