A currency swap is equivalent to a
A)currency option,with the exercise price equal to the current spot rate
B)long-dated forward foreign exchange contract,where the forward rate is the current spot rate.
C)interest rate swap,where the basis is the differential between the fixed and floating interest rates
D)short-term currency futures contract

Question

Quizplus · Accepted Answer

A currency swap is an agreement between two parties to exchange principal and interest payments of two different currencies. It is similar to a long-dated forward foreign exchange contract as the parties agree to exchange currencies at a future date, but the swap also involves periodic interest payments. Option A is incorrect as a currency option gives the holder the right, but not the obligation, to exchange a currency at a specified rate. Option C is incorrect as an interest rate swap involves exchanging fixed and floating interest payments in the same currency. Option D is incorrect as a futures contract involves buying or selling a specified amount of a currency at a future date at a specified price, without any exchange of principal or interest.

A Currency Swap Is Equivalent to a