In a foreign currency swap, one party makes payments denominated in one currency and the counterparty makes payments in other currency. At the initiation, both parties exchange the notional amount as they are in two different countries.Assume Party A enters into a swap contract with Party B at year zero. As per the contract, Party A exchanges $150 in exchange of £100 [Exchange rate: $1.5/1£]. Note that at year zero, any two parties can get from the market and hence the swap contract does not have any value and none will buy the swap contract for a price when anybody can enter into a contract at the prevailing market rate. As long as the exchange rate remains same, the swap value will be zero. If the interest rate in UK increases it will consequently appreciate the dollars and the value of £100 decreases (say £105). Now the swap contract of “$150 for £100” has a value since the exchange rate changes. Hence, at inception the value of the swap is zero and the notional amounts ($150 & £100) are exchanged between the two parties. Note that the notional amounts and swap value are different.