Interest Rate Swap (plain vanilla) and Currency Swap

Interest rate swap (plain vanilla):
· One party pays interest coupons based on a fixed rate and the other pays coupons based on LIBOR that sets for the period.
· Payments are exchanged on a net basis and there is no exchange of notional value.
· At least one of the sequence of cash flow is uncertain.

Currency swap:

· Notional amounts and payments on the two sides are denominated in different currencies. The most common type involves the exchange of LIBOR-based payments in US dollars and fixed rate payments in a foreign currency
· A borrower who has floating rate liabilities and is concerned about a rise in interest rates should enter into a pay-fixed swap to fix its cost of debt.A borrower who has fixed rate liabilities and is concerned about a fall in interest rates should enter into a receive-fixed swap to convert its debt into floating rate.
· The notional principal change hands at the beginning of the swap; Interest payment are made without netting (A pays interest in USD to B, D pays in AUD to B at the settlement date)
· The notional principal is swapped again at the termination of the agreement;
· Generally, the variable interest rate for USD determined at the beginning and pay at the end of the settlement period.