A cross currency swap that does not start at the contract date, but rather comes into effect at a certain future date. Deferral of start date (effective date) allows a party to the swap to match up the cash flows scheduled for an instrument (such as a bond) with those of the swap.
The swap is deferred on terms defined and agreed at the time the agreement is concluded. This involves determination of the fixed rate currency and the floating rate payment (such as U.S dollar LIBOR), the effective date, the term of the swap, etc. A cross currency swap combines the features of a currency swap and an interest rate swap. In cross currency swaps, a loan denominated in one currency and effected at a fixed rate is typically swapped for a floating rate loan denominated in another currency.
A cross-currency swap has two principal amounts, each denominated in a different currency. The exchange of principal at forward inception is optional (i.e., the initial principal amounts can be exchanged or not depending on counterparties agreement). However, it is essential that the counterparties agree to exchange principal amounts at the swap’s maturity date.
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