Which type of swap involves the exchange of principal payments and interest obligations in different currencies?

A currency swap is a financial agreement between two parties to exchange principal amounts and interest payments in different currencies. This type of swap allows organizations to access foreign capital at potentially lower costs compared to borrowing directly in foreign markets. It can also help firms hedge their exposure to fluctuations in exchange rates, making it a key tool in international finance.

In a currency swap, the parties typically exchange not only interest payments over the life of the agreement but also the principal amounts at the beginning and end of the swap's term, aligning with their respective financing needs in the local currencies. This structure gives companies the flexibility to manage their currency risk and optimize their capital structure in foreign currencies, providing them with a strategic advantage.

The other types of swaps—commodity swaps, credit default swaps, and total return swaps—serve different purposes and do not involve the exchange of principal payments in multiple currencies. Commodity swaps relate to trading the cash flows of commodities, credit default swaps are about managing credit risk, while total return swaps involve exchanging cash flows based on the total return of an asset, not involving currency exchanges. Therefore, a currency swap is uniquely defined by its currency-focused principal and interest payment exchanges, making it the correct answer in this context.