the other is float- ing-rate but with the reference rate stated in another currency but denomi- nated in the domestic currency. For example, a differential swap may have one party paying six-month sterling Libor, in sterling, on a notional princi- pal of £10 million, and receiving euro-Libor minus a margin, payable in sterling and on the same notional principal. Differential swaps are not very common and are the most difficult for a bank to hedge. The hedging is usu- ally carried out using what is known as a quanto option.   Forward-Start Swap A forward-start swap is one where the effective date is not the usual one or two days after the trade date but a considerable time afterwards, for instance say six months after trade date. Such a swap might be entered into where one counterparty wanted to fix a hedge or cost of borrowing now, but for a point some time in the future. Typically this would be because the party considered that interest rates would rise or the cost of hedging would rise. The swap rate for a forward-starting swap is calcu- lated in the same way as that for a vanilla swap.       CANCELLING A SWAP   When financial institutions enter into a swap contract in order to hedge interest-rate liabilities, the swap will be kept in place until its expiration. However, circumstances may change or a financial institution may alter its view on interest rates, and so circumstances may arise such that it may     be necessary to terminate the swap. The most straightforward option is for the corporation to take out a second contract that negates the first. This allows the first swap to remain in place, but there may be residual cash flows unless the two swaps cancel each other out precisely. The terms for the second swap, being non-standard (and unlikely to be a exactly whole years to maturity, unless traded on the anniversary of the first), may also result in it being more expensive than a vanilla swap. As it is unlikely that the second swap will have the same rate, the two fixed legs will not net to zero. And if the second swap is not traded on an anniver- sary, payment dates will not match. For these reasons, an entity may wish to cancel the swap entirely. To do this it will ask a swap market maker for a quotation on a cancellation fee. The bank will determine the cancellation fee by calculating the net present value of the remaining cash flows in the swap, using the relevant discount factor for each future cash flow. In practice just the fixed leg will be present valued, and then netted with Libor. The net present value of all the cash flows is the fair price for canceling the swap. The valuation prin-