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Pricing: For a floating-floating currency swap where only the exchange rate is hedged, a market. exchange rate (typically, the spot rate as of the effective date of the swap) is used to convert the. payment amounts of the local currency into the target currency. The same exchange rate is used.
Rather, swaps are over-the-counter contracts between businesses or financial institutions. BREAKING DOWN 'Swap' Interest Rate Swaps. In an interest rate swap, the parties exchange cash flows based on a notional principal amount (this amount is not actually exchanged) in order to hedge against interest rate risk or to speculate. For example, say ABC Co. has just issued $1 million in five-year bonds with a variable annual interest rate defined as the London Interbank Offered Rate (LIBOR) plus 1.3% (or 130 basis points).