Question

Discuss the causes of changes in a currency swaps value over time. Is it possible to close out a currency swap before it reaches maturity

Answer 1

Answer: When a swap is agreed on by both parties involved, a cash flow of bonds in different currencies are agreed upon to be exchanged.

Explanation:

The cash flows of two bonds in separate currencies are negotiated upon to be traded when a swap is initiated. At the existing spot exchange rate, these bond-like cash flows have the same present value. Evidently, shifts in the exchange rate change the value of one side of the swap relative to the value of the other side of the swap. Furthermore, interest rate rises reduce the present value of currency.

The current value of cash flows is increased by flows and decreases in interest rates. Changes in interest rates and exchange rates thus offer meaning to currency swaps.

One side is triumphant and the other loses. By making the party that lost money in the swap pay this amount to the party that has gained value in the swap, it is possible to close a swap.