Unlike a plain vanilla currency swap, a flavored currency swap is a more complicated structure that eases up specific standard features in response to counterparties’ special requirements. For instance, counterparties may agree to allow the notional principal to vary over the tenor of the swap. In this case, the swap can be amortizing (i.e., the notional principal amount (NPA) decreases over the swap’s tenor), accreting (the NPA increases over the swap’s tenor), rollercoaster (the NPA varies according to prespecified changes over the tenor of the swap), and seasonal (the NPA fluctuates from one season of year to another based on a specified pattern). In everyday business, a firm based in the U.S. might be importing Christmas gifts and similar items from a China-based firm in the weeks running up to the Christmas season. The firm may need to pay for the imports in Chinese yuans. To that end, it can enter into a currency swap with a seasonal notional principal to match its increasing expected need for foreign currency in Christmas season. A fixed-for-fixed currency swap can be constructed from two alternate fixed-for-floating swaps.
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