Currency Swaps, Equity Swaps, and Contracts for Difference

A multinational corporation raising capital faces a painful mismatch: its best market for borrowing may be in a currency it does not need. The currency swap solves this: the firm borrows where it is cheapest, then swaps the liability into the currency of its revenues, locking in a known exchange rate on every future interest and principal payment. This is genuine comparative advantage — unlike the illusory kind in plain vanilla interest rate swaps, cross-currency comparative advantages can be real, driven by tax differentials, investor bases, and regulatory constraints.

• describe the cash flows in a fixed-for-fixed currency swap, including initial and final principal exchanges;
• value a currency swap using both the bond decomposition and the portfolio-of-forwards approach;
• explain why the comparative-advantage motivation for currency swaps is more credible than for interest rate swaps;
• describe the main variants: fixed-for-floating and floating-for-floating (cross-currency basis) swaps;
• identify the sources of credit risk in a swap book and explain how central clearing and netting reduce them;
• describe equity swaps and contracts for difference as members of the delta-one family.

1. Fixed-for-fixed currency swaps
2. Comparative advantage in currency swaps
3. Valuation of fixed-for-fixed currency swaps
4. Other currency swap variants
5. Credit risk in swap books
6. Equity swaps
7. Contracts for difference (CFDs)