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FX swaps swap the principal amounts. So a default between the spot and forward legs can leave you with a chunky liability. Unlike single currency interest rate
by lucozade 4y ago
FX swaps swap the principal amounts. So a default between the spot and forward legs can leave you with a chunky liability.
Unlike single currency interest rate swaps where the principal is notional in the sense that they aren't exchanged, they're just used to calculate the coupon exchange.
- AnimalMuppet 4y agoOK, but "chunky" is still much less than the notional value, right? (I mean, if one currency suffered runaway inflation, it could approach 100%, but that should be rare...)
- lucozade 4y agoIt's not a notional principal for a fx swap, it's an actual principal that you swap. If your counterpart defaults, you're still liable for what you owe (usually multiple millions) but you won't receive the other side.
- snake_doc 4y agoBut in a sense, only the cost of capital is at risk, not the capital borrowed. The 80T number is capital borrowed. It’s definitely worthy of skepticism. It’s definitely a liquidity risk given the short term and principal swaps requirements, hence mostly a central bank issue as a backstop. But potential losses in economic terms seem smaller.
- qaq 4y agoThank you for the explanation, I guess time to be concerned.