Currency Swaps

Can someone please explain/outline all of the transactions involved in a currency swap from start to finish? Many thanks!!

Bob and Mary enter into a 2-year, semiannual pay, €10,000,000 notional, fixed-for-fixed, $-for-€ currency swap. The spot exchange rate is 1.30/€, the risk-free rate is 2.2%, and the € risk-free rate in 1.8%.

At inception:

Bob gives Mary $13,000,000, Mary gives Bob €10,000,000.

At 6 months, 12 months, 18 months, and 24 months:

Bob gives Mary €90,000, Mary gives Bob $143,000.

At 24 months:

Bob gives Mary €10,000,000, Mary gives Bob $13,000,000.

Bob’s your uncle. (And Mary’s your aunt.)

How about you read this from the CFA text, try writing out the outlines yourself and then highlight specific parts you don’t really understand , I am sure people will be more than willing to explain.

Thanks for this- very helpful indeed.

Am I right in saying that there is no implicit assumption that Mary and Bob both invest their borrowings (ie buy bonds) at the local rate?


You’re welcome. Glad to help.

None whatsoever. Bob and Mary probably both go blow it at the track, then have to borrow from loan sharks to make the semiannual interest payments and return the principle at the end.

Bob and Mary like to live on the edge.

My pleasure.

Haha thank you

Finance is fun!