Quanto Swap

AAA

DEFINITION of 'Quanto Swap'

A swap with varying combinations of interest rate, currency and equity swap features, where payments are based on the movement of two different countries' interest rates.

This is also referred to as a differential or "diff" swap.

INVESTOPEDIA EXPLAINS 'Quanto Swap'

Though they deal with two different currencies, payments are settled in the same currency. For example, a typical quanto swap would involve a U.S. investor paying six-month LIBOR in U.S. dollars (for a US$1 million loan), and receive payments in U.S. dollars at the six-month EURIBOR + 75 basis points.

Fixed-for-floating quanto swaps allow an investor to minimize foreign exchange risk. This is achieved by fixing both the exchange rate and interest rate at the same time. Floating-for-floating swaps have slightly higher risk, since each party is exposed to the spread between each country's currency interest rate.

RELATED TERMS
  1. LIBOR

    LIBOR or ICE LIBOR (previously BBA LIBOR) is a benchmark rate ...
  2. Callable Swap

    An exchange of cash flows in which one counterparty makes payments ...
  3. Amortizing Swap

    An exchange of cash flows, one of which pays a fixed rate of ...
  4. Euro Interbank Offer Rate - EURIBOR

    The rates offered to prime banks on euro interbank term deposits. ...
  5. Currency Swap

    A swap that involves the exchange of principal and interest in ...
  6. Interest Rate Swap

    An agreement between two parties (known as counterparties) where ...
Related Articles
  1. Options & Futures

    An Introduction To Swaps

    Learn how these derivatives work and how companies can benefit from them.
  2. Options & Futures

    What are the differences between divergence and convergence?

    Find out what technical analysts mean when they talk about a market experiencing divergence or convergence and how they affect trading strategies.
  3. When trading in financial markets, higher returns are generally associated with higher risk. Hedge your risk with interest rate swaps.
    Investing Basics

    How Are Interest Rate Swaps Valued?

    When trading in financial markets, higher returns are generally associated with higher risk. Hedge your risk with interest rate swaps.
  4. Options & Futures

    Futures Quotes Explained The "Easy" Way

    If there’s a security whose price fluctuates, there can theoretically be a futures marketplace for it.
  5. Options & Futures

    Why is the Accumulative Swing Index helpful for traders and/or investors?

    Find out why J. Welles Wilder believed that the accumulative swing index could be used in the futures markets to indicate long-term trends.
  6. Options & Futures

    Stock Futures vs Stock Options

    A full analysis of when is it better to trade stock futures vs when is it better to trade options on a particular stock. A quick overview of how each of them works and why would a trader, investor, ...
  7. Options & Futures

    The Potential Of Low-Priced Options

    The benefits of trading low-priced options, and learning how to pinpoint them, can be a very profitable strategy for an options trader.
  8. First time stock investors may ask, is there any way to buy insurance on stocks to prevent losses?
    Options & Futures

    Stock Safety: Top 3 Ways to Limit Your Losses

    First time stock investors may ask, is there any way to buy insurance on stocks to prevent losses?
  9. Investors can use derivative securities to effectively buy insurance on their individual holdings or on their portfolio as a whole.
    Options & Futures

    Can You Buy Stock Insurace? 3 Strategies to Limit Stock Losses

    Investors can use derivative securities to effectively buy insurance on their individual holdings or on their portfolio as a whole.
  10. Options & Futures

    How The Price Of Stock Futures Is Calculated

    Any derivative that exists can be securitized into a future, though of course most investors deal with the stock variety. Here's how they're priced.

You May Also Like

Hot Definitions
  1. Santa Claus Rally

    A surge in the price of stocks that often occurs in the week between Christmas and New Year's Day. There are numerous explanations ...
  2. Commodity

    1. A basic good used in commerce that is interchangeable with other commodities of the same type. Commodities are most often ...
  3. Deferred Revenue

    Advance payments or unearned revenue, recorded on the recipient's balance sheet as a liability, until the services have been ...
  4. Multinational Corporation - MNC

    A corporation that has its facilities and other assets in at least one country other than its home country. Such companies ...
  5. SWOT Analysis

    A tool that identifies the strengths, weaknesses, opportunities and threats of an organization. Specifically, SWOT is a basic, ...
  6. Simple Interest

    A quick method of calculating the interest charge on a loan. Simple interest is determined by multiplying the interest rate ...
Trading Center