In an interest-only currency swap
A)the counterparties must raise the actual notational principal in their home markets; then exchange it for the foreign currency they desire.They must also hedge with forward contracts on the currency.
B)the counterparties periodically exchange the amortized portions of the notational principals.
C)both a) and b)
D)none of the above

Question

Quizplus · Accepted Answer

In an interest-only currency swap, the counterparties do not exchange or amortize the notational principal. Instead, they agree to pay interest only on the notational principal for a predetermined period of time, after which they will exchange the original notational principal in the original currencies. Therefore, the correct choice is A, as the counterparties must initially raise the actual notational principal in their home markets and exchange it for the desired foreign currency. They must also hedge the currency risk with forward contracts.

In an Interest-Only Currency Swap