Which of the following is equivalent to a plain vanilla receive fixed currency swap? A) A long position in a foreign bond coupled with the issuance of a dollar-denominated floating rate note. B) A short position in a foreign bond coupled with the issuance of a dollar-denominated floating rate note. C) A long position in a foreign bond coupled with a long position in a dollar-denominated floating rate note. D) A short position in a foreign bond coupled with a long position in a dollar-denominated floating rate note. Your answer: A was correct! A long position in a fixed rate foreign bond will receive fixed coupons denominated in a foreign currency. The short floating rate note requires U.S. dollar denominated floating-rate payments. Combined, these are the same cash flow as a plain vanilla currency swap. MY QUERY - In a currency swap shouldnt we be receiving fixed amounts of domestic currency and pay foreign currency ? Or Am I getting royally confused… ? In the above scenario it is just the opposite ! thanks in advance…
since you swap your domestic funds with foreign funds, you get paid interest on domestic funds and pay interest on foreign funds.
I agree… and that is exactly what my query is… If I issue a domestic floating rate note, as mentioned in the question ,wont I be paying dollar denominated floating payments… whereas I will receive foreign currency… which is exactly the opposite of what a plain vanilla swap is…