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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 ...
According to the International Swaps and Derivatives Association, 80% of the world's top 500 companies as of April 2003 used interest rate derivatives to control their cashflows. This compares with 75% for foreign exchange options , 25% for commodity options and 10% for stock options .
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.
Examples of this phenomenon include interest rate-and currency-swaps. As regards valuation, given their complexity, exotic derivatives are usually modelled using specialized simulation-or lattice-based techniques. Often, it is possible, to "manufacture" the exotic derivative out of standard derivatives. [3]
Cross Currency Swap Valuation, Working Paper 2, HfB - Business School of Finance & Management SSRN preprint. Tuckman B. and Porfirio P. (2003). Interest Rate Parity, Money Market Basis Swaps and Cross-Currency Basis Swaps, Fixed income liquid markets research, Lehman Brothers; Multi-curves framework: Henrard M. (2007).
A currency pair is the quotation of the relative value of a currency unit against the unit of another currency in the foreign exchange market. The currency that is used as the reference is called the counter currency , quote currency, or currency [ 1 ] and the currency that is quoted in relation is called the base currency or transaction currency.