Explanation:
Attribute I is incorrect. The value of any derivative including currency swaps agreements is zero at the inception of the contract. A non-zero initial value can give rise to arbitrage profit.
Attribute II is correct because although swap contracts generally require the exchange of principal amount, in some swap contracts, however, only the transfer of interest is required. In such cases, every interest payment under currency swap agreements is similar to a forward foreign currency contract.
Attribute III is also correct because currency swaps are used to transform liabilities and assets.
Q.717 Fabian Fabio is a former currency trader at Global FX Corp. He recently joined Baltic Investments Company as the head of currency derivatives. After joining Baltic, he circulated an informative email regarding terms and terminologies of currency swaps to his team. His email contained the following details regarding currency swaps:
I. Unlike other derivatives, the value of currency swaps is non-zero at the initiation of currency swaps
II. Each periodic exchange of interest rate in a currency swap is equal to a forward foreign exchange contract
III. Currency swaps are used to transform debt denominated in one currency into debt denominated in another currency
Which of the mentioned attributes of currency swaps are correctly defined in the email?
A
Attributes I & II
B
Attributes II & III
C
Attributes I & III
D
Attributes I, II & III
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