Converting foreign cash receipts

In converting quarterly foreign cash receipts of 6 Million Euros to USD, What do we need the swap rates for? Cant we simply lock the current exchange rate i.e 0.8 Euros/USD ? Why are calculating the Notional principle? Thanks


Swaps are essentially a series of forward contracts. Notional principal is required because it is the amount at the fixed rate that derives the payment or receipt. You have effectively locked the rate for the length of the swap. This is beneficial if your cash flows are predicitable.

you are receiving x amount of foreign currency interest in some time in the future. you need to be assured

a) of getting that interest … . which amount you know and whose rate you know. so amount / rate - gives you the notional principal to set aside to get that amount of interest in an assured manner.

b) once you get the amount - you now convert at the current rate into the other currency. (domestic one).

this then is the set up for the swap…