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

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

Recording the trade—contingent

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