CFA Practice Question

CFA Practice Question

Which of the following is (are) true in a plain vanilla currency swap?

I. No money changes hands up front.
II. The value of the swap is zero at initiation.
III. Interest payments are made on a net basis.
A. II only
B. II & III
C. I & II
Explanation: In a plain vanilla currency swap, the face values are in different currencies and these principal amounts are exchanged at swap initiation and swap maturity. The interest amounts to be paid at each settlement date are also in different currencies and are exchanged on a gross basis i.e. each party pays the full interest amount to the other without any netting. Note that all these features are opposite to that of a plain vanilla interest rate swap. The one things common between the two is that both of them have a zero value at initiation so that the parties are financially indifferent between taking either side of the swap.

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