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Accounting for Investments, Volume 2: Fixed Income Securities and Interest Rate Derivatives—A Practitioner's Guide by R. Venkata Subramani

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THE TRADE LIFE CYCLE FOR CROSS-CURRENCY SWAPS

  • Recording the trade—contingent
  • Account for the upfront fee (premium on the trade)
  • Pay/receive the upfront fee for the trade
  • Reset the interest rate for both legs—receivable and payable
  • Account for accrued interest on pay leg on valuation date
  • Account for accrued interest on receive leg on valuation date
  • Reverse the accrued interest on pay leg on coupon date
  • Reverse the accrued interest on receive leg on coupon date
  • Account for the interest payable on the pay leg on coupon date
  • Account for the interest receivable on the receive leg on coupon date
  • Pay the pay leg (one currency)
  • Receive the receive leg (another currency)
  • Reverse the existing net present value of the trade
  • Ascertain the fair value on valuation date
  • Termination of the trade and accounting for termination fee
  • Payment or receipt of termination fee
  • Maturity of the trade
  • Reversal of the contingent entry on maturity/termination
  • FX revaluation entries
  • FX translation entries

Let us assume the contract data as shown in Table 12.2 for the purpose of understanding the trade life cycle for a cross-currency interest rate swap.

Table 12.2 Details of cross-currency swap contract

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Recording the trade—contingent

Unlike interest rate swaps there may be an exchange of principal taking place ...

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