Currency Swaps - Do future spot rates matter at all?

[hei.so]

A US company enters into a 5-year currency swap for €. At the beginning it is $1/€1. At the end of five years, it is $1.5/€1. To calculate interests and principal, you only use $1/€1, correct? A swap is like many recurring forwards and you LOCK IN the rate at time 0. You don’t use a different rate at year 1, 2, etc.?

 

[S2000magician]

You lock in the notional principal at the beginning, but not the exchange rate.
In your example, if it were a fixed-for-fixed currency swap on $10 million notional, then the EUR notional would be €10 million (given your EUR/USD 1.0 initial exchange rate). If the USD fixed rate were 5% and the EUR fixed rate were 4%, then every year the payments would be $500,000 and €450,000, and at the end of 5 years you would swap back the notional principals: $10 million for €10 million.

 

[hei.so]

^ So in other words, your exchange rate after Year 0 does not matter because the interest is based on the NP which is locked in at the exchange rate at time 0.

 

[S2000magician]

The future exchange rates most certainly matter: if I pay USD and receive GBP, I need to convert the GBP to USD, and that will be done at the prevailing exchange rate.