Hi, I cannot understand the following paragraph given in the Currency Swaps section (immediately before the Characteristics) - -------------------------------------------------------------------------------------- The exchange of pricipal under the swap at the end of the contract will be in the direction as the interest flows. The initial exchange of principal under a currency swap is in the opposite direction to the interest payments and terminal exchange of principal. -------------------------------------------------------------------------------------- Someone, please enlighten me and lead me to salvation. Cheers Nish
So in the example given above in the notes: the £10m is paid out at the start and the interest payments in £'s are paid out but at the end the £10m is paid back So it is the in the opposite direction to the initial and interest payments.
Hi John, Thanks for your response. The notes also say that payments of the net difference between £ & $ interest rates are made or received during the term of the swap. So, if the interest payments are made to the receiver of the £s in the initial swap, then the first line of the paragraph below doesn't make sense. Would really appreciate if you can clarify. Cheers Nish.
Based on the statement : "the initial exchange of principal under a currency swap is in the opposite direction to the interest payments and the terminal exchange of principal". If one party pays out £ initially, they will receive £ in interest during the swap and £ at the end of the swap. They will only actually receive the interest payments to the extent that the amount that they should receive exceeds the amount they owe to the other party (this is the "netting off" mentioned). To be honest, so long as you know the Core Reading on this topic for the exam, that's all I expect you to be tested on.
