How to use a coupon bond to purchase a bond?

Question

I have been stomped on this question say I am a US investor and I want to just receive JPY coupon using my US coupon. How do I do this? Is a just a straight exchange of paying fixed US coupon and receiving fixed JPY coupon? Or is it more complicated than that

Answer 1

A common way to do this is with a currency swap. With a currency swap, you agree to pay either a fixed or floating amount each period in exchange for a fixed or floating amount amount in a different currency. They are only traded over-the-counter, typically by investment banks on a very large to hedge specific risks. With floating-rate swaps, the floating rate is typically determined by some industry standard interest rate quote.

As an example, Say you entered into a float-float swap with a notional of $1,000,000 where you pay a coupon in the amount of the Secured Overnight Funds Rate (SOFR) and receive a coupon in JPY calculated using the Mutan interest rate (the standard overnight rate for Japan). Each quarter (or month, depending on the terms of the contract), you pay the other side USD and they pay you JPY.

If you have a fixed-rate bond, and thus want to pay a fixed amount of USD, you could to a fixed-to-float swap, but the mechanics would be similar; you'd pay a fixed amount of USD in exchange for a floating rate in JPY.

There are also fixed-fixed swaps, where you trade a fixed amount of one currency for a fixed amount in another, but they are less common. Swaps are typically used to protect against interest rate risk is specific currencies (hence the floating leg), but a fixed-fixed swap is possible. The "exchange rate" would be fixed at the onset of the swap and be based on the market's expectation of future exchange rates.