Currency swaps – basics

Question

This might be level 1 material, but can anybody show me the picture/process of a currency swap? I'm mainly confused on who's paying which currency when they are "exposed" to one currency (the direction)

Let's say we are talking about $USD and $CAD. If Party A wants to "hedge $CAD exposure" (I'm assuming this means Party A pay $CAD fixed? or is it the other way round?), what happens at initiation, payments, and termination?

Initiation:
Party A pays $USD principal and receives $CAD principal.

Periodically:
Party A pays fixed rate on $CAD and receives float/fixed $USD.

Termination:
Party A returns $CAD principal + last coupon payment and receives back $USD principal + coupon.

Is the above correct for hedging $CAD exposure? It would be best if the solution can be presented in the above format, thanks!

Zee Tan · Answer

Hi @Ryshi!

Your second interpretation is right. Party A receives CAD in float, so whatever liabilities they have in CAD is hedged (i.e. they simply take whatever they receive from the swap to pay off their CAD liabilities. Hence they've hedged $CAD exposure.

Ryshi · Answer

Nevermind I think "Hedge $CAD exposure" is equivalent to "Pay $CAD initially", so:

Initial:
Party A pays $CAD receive $USD

Periodically:
Party A receives $CAD coupon and pays $USD

Termination:
Party A receives back $CAD principal and pays $USD principal.