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A cross-currency swap's (XCS's) effective description is a derivative contract, agreed between two counterparties, which specifies the nature of an exchange of payments benchmarked against two interest rate indexes denominated in two different currencies.
In finance, a foreign exchange swap, forex swap, or FX swap is a simultaneous purchase and sale of identical amounts of one currency for another with two different value dates (normally spot to forward) [1] and may use foreign exchange derivatives. An FX swap allows sums of a certain currency to be used to fund charges designated in another ...
A currency swap involves exchanging principal and fixed rate interest payments on a loan in one currency for principal and fixed rate interest payments on an equal loan in another currency. Just like interest rate swaps, the currency swaps are also motivated by comparative advantage. Currency swaps entail swapping both principal and interest ...
Triangular arbitrage opportunities may only exist when a bank's quoted exchange rate is not equal to the market's implicit cross exchange rate. The following equation represents the calculation of an implicit cross exchange rate, the exchange rate one would expect in the market as implied from the ratio of two currencies other than the base currency.
Non-linear IRDs form the set of remaining products. Those whose PVs are commonly dictated by more than the one-to-one movement of the underlying interest rate index. Examples of non-linear IRDs are; swaptions, interest rate caps and floors and constant maturity swaps (CMSs). These products' PVs are reliant upon volatility so their pricing is ...
In the case of an FX option on a rate, as in the above example, an option on GBPUSD gives a USD value that is linear in GBPUSD using USD as the numéraire (a move from 2.0000 to 1.9000 yields a .10 × $2,000,000 / $2.0000 = $100,000 profit), but has a non-linear GBP value. Conversely, the GBP value is linear in the USDGBP rate, while ...
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For USD and EUR this follows an ACT/360 convention and GBP follows an ACT/365 convention. The cash amount is paid on the value start date applicable to the interest rate index (depending in which currency the FRA is traded, this is either immediately after or within two business days of the published -IBOR fixing rate).