they have received when principals are exchanged. It may seem that exchanging the same amount at maturity gives rise to some sort of currency risk, in fact it is this feature that removes any element of currency risk from the swap transaction. Currency swaps are widely used in association with bond issues by bor- rowers who seek to tap opportunities in different markets but have no requirement for that markets currency. By means of a currency swap, a corporation can raise funds in virtually any market and swap the proceeds into the currency that it requires. Often the underwriting bank that is responsible for the bond issue will also arrange for the currency swap trans- action. In a currency swap, therefore, the exchange of principal means that the value of the principal amounts must be accounted for, and is dependent on the prevailing spot exchange rate between the two currencies. The same principles we established earlier in the chapter for the pric- ing and valuation of interest rate swaps may also be applied to currency swaps. A generic currency swap with fixed-rate payment legs would be valued at the fair value swap rate for each currency, which would give a net present value of zero. A floating-floating currency swap may be valued in the same way, and for valuation purposes the floating-leg payments are replaced with an exchange of principals, as we observed for the floating leg of an interest rate swap. A fixed-floating currency swap is therefore     valued at the fixed-rate swap rate for that currency for the fixed leg, and atLiborortherelevantreferencerateforthefloatingleg.       SWAPTIONS   A bank or corporation may enter into an option on a swap, which is called a swaption. The buyer of a swaption has the right but not the obli- gation to enter into an interest rate swap at any time during the options life. The terms of the swaption will specify whether the buyer is the fixed- or floating-rate payer; the seller of the option (the writer) becomes the counterparty to the swap if the option is exercised. In the market, the convention is that if the buyer has the right to exercise the option as the fixed-rate payer, the buyer has purchased a call swaption, while if by exercising the buyer of the swaption becomes the floating-rate payer he has bought a put swaption. The writer of the swaption is the party that has an obligation to establish the other leg. Swaptions are up to a point similar to forward start swaps, but the buyer has the option of whether or not to commence payments on the effective date. A bank may purchase a call swaption if it expects interest rates to rise, and will exercise the option if indeed rates do rise as the