What does Quanto Swap mean?
When a transaction is carried out in one currency but settled in another currency at a predefined exchange rate and interest rate, it is known as a Quanto Swap. It is a type of swap that protects traders from currency fluctuations and foreign exchange risk. Quanto Swap is also known as a differential or "diff" swap.
Futures Knowledge Explains Quanto Swap
The payments in such cases are dependent on the movement of two different currencies interest rates. However, both legs of the swap are paid in the same currency. The parties adhere to a predetermined payment schedule on a predefined notional amount in single currency.
For example, two investors may swap interest rates, one calculated in British pounds and one calculated in U.S. dollars, and settle in dollars.