Quanto Swap

A quanto swap a.k.a. differential swap is an interest-rate swap transacted in one notional currency but settled in another. One of the interest references is different from the currency of the notional principal e.g. one counterparty pays US dollar Libor (plus a spread) and receives yen Libor and the notional principal of the swap is in one, the other or a third currency. Quanto swaps were designed to offer traders an opportunity to benefit from interest-rate differentials without taking any currency risk.