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Currency swaps – basics

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    • Avatar of RyshiRyshi
      Participant
        03 Apr 2017 at 11:59 am
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        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!

      • Avatar of Zee TanZee Tan
        Keymaster
          • CFA Charterholder
          03 Apr 2017 at 3:37 pm
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          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.

        • Avatar of RyshiRyshi
          Participant
            03 Apr 2017 at 12:18 pm
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            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.

          • Avatar of hairyfairyhairyfairy
            Participant
              • Undecided
              04 Apr 2017 at 6:27 pm
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              Helped me out, thanks!

            • Avatar of SarahSarah
              Participant
                03 Apr 2017 at 12:35 pm
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                @Ryshi welcome to 300hours!

                That sounds about right. (your second post)
                Are you working through Derivatives right now?

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