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FRM Part I · FRM Exam Part I · Swaps

Which statement correctly distinguishes a standard fixed-for-fixed currency swap from a plain-vanilla single-currency interest rate swap?

A standard currency swap exchanges principal in the two currencies at the start and swaps them back at maturity, typically at the original spot rate. A single-currency interest rate swap has no principal exchange because both legs share a currency and interest is netted.

  1. ANotional principal amounts in the two currencies are normally exchanged at initiation and re-exchanged at maturity, usually at the initial spot rateCorrect
  2. BOnly interest payments are exchanged, and principals are netted at maturity at the prevailing spot rate
  3. CPrincipals are exchanged only at initiation and are never returned
  4. DInterest payments in the two currencies are netted into a single payment in the domestic currency at each date

Explanation

In a currency swap the principals are denominated in different currencies, so they are generally exchanged at the start and re-exchanged at the end, normally at the same rate (the initial spot rate). A vanilla interest rate swap has one currency, so principals are never exchanged and interest is netted. Netting interest across currencies is not standard.

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