The background of the swap transaction I just learned is that Canadian Jane bought an American fixed-income low-risk bond with an annual yield of 5%, which will expire one year later. Interest is calculated in dollars. Mike is Jane's banker, and Jane's future must be good for Mike.

(Handling fee or Mike needs trading volume (P.S. Bank) If the bid-ask spread of foreign exchange is profitable, it will be more profitable than setting up a foreign exchange trading department, but they need trading volume. Need a developed market with strong liquidity) or MIKE thinks there is an opportunity to do carry trade, that is, interest rate parity will not be established this year. Carry trade can take Japan as an example, where the interest rate is almost 0%. If you borrow Japanese yen and change it into US dollars, you can invest in two-year treasury bonds. Assuming the interest rate is 0.5%, you can change the US dollars into Japanese yen after the maturity. If the exchange rate of US dollars against Japanese yen remains unchanged after two years, you can make a profit of 0.5%. If you apply it,

After understanding MIKE's trading motives, it should be clear that MIKE does not have Canadian dollars on hand after one year, and if he changes Canadian dollars after one year, he will also face exchange rate risks. Therefore, he must borrow the local currency US dollars and convert them into Canadian dollars, and then exchange them with Jane one year later (SWAP for USD-CAD means SWAP), and then repay the US dollar loan. Note that MIKE only changed CAD once for SWAP, and he bought the spot, and the exchange rate was the determined spot market price. Later, the exchange with Jane was an agreed price, which also locked the exchange rate, so the foreign exchange risk was avoided.

Mike's cost (income) is the difference between lending Canadian dollars and borrowing US dollars.