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Quanto swap
       
 
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Quanto swap

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Quanto swap
Also called a differential Swap. A quanto Swap is a fixed-floating or floating-floating Interest rate Swap. One of the floating rates is a foreign Interest rate, but is applied to a notional amount denominated in the domestic Currency. For example, a US investor may enter into a five-year Swap in which he makes payments in US dollars at the six-month USD Libor plus a spread semi-annually, and receives payments in US dollar at JPY Libor. The payments are calculated by applying the respective Interest rates to a notional amount of US$100 million. However, the notional principal can also be denominated in the Japanese Yen, or in a third Currency such as the British pound. A quanto Swap enables the investor to avoid Exchange rate Risk while taking advantage of Interest rate differentials. A corporate borrower with Debt in a Discount Currency can use a quanto Swap to lower his borrowing costs, while Portfolio managers can use a quanto Swap to enhance Yield with higher Interest rates in a Discount Currency.
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