What is a difference between currency swaps and interest rate swaps?

What is a difference between currency swaps and interest rate swaps?
A . Currency swaps do not require the exchange of notional principal on maturity.
B . Currency swaps allow banks and customers to obtain the risk/reward profile of long-term interest rates without having to use long-term funding.
C . Currency swaps are OTC derivative contracts.
D . Currency swaps generate foreign exchange rate risk in addition to interest rate risk.

View Answer

Answer: D

Explanation:

Currency swaps and interest rate swaps differ primarily in the risks they manage and generate. While both are OTC derivative contracts, currency swaps involve the exchange of principal and interest payments in one currency for principal and interest payments in another currency. This not only involves managing interest rate risk but also introduces foreign exchange rate risk, as fluctuations in currency exchange rates can affect the value of the payments exchanged.