currency swap question question

burning0spear

it is addressed frequently that swaps are a zero-sum game.

However, i notice from an example on scheweser notes that by fixed-for-fixed currency swap, both parties gain. i.e., they both managed to lend at a lower rate.

Is that an exception or i got it wrong?

nitoha

I think this could be referencing the comparative advantage that can be achieved depending on which market they are entering

spartanag07

im not sure which example you are referring to, but swaps by definition have to be zero sum. Both sides of a xccy swap can gain from the transaction as a whole (ie swap vs their domestic funding), but on the swap alone their payoff/pnl must be zero sum

by the way i havnt done any CFA yet (or started studying) so my explanation may differ from the readings

farrukhsadiq

thanks, that explains a little, can i just put it this way: alothough both parties paid less using swaps, no wealth has been created, the banks lending the money received the exact amount of interest they expected?

JPSem

the gain is from the interest at the risk free rate.

marsilni

Stephaniez: Excellent question.

Both parties gain because they effectively gain access to a loan in a foreign country at a more competitive rate. Currency swaps are an exception in that sense.