We did the adult/kid word explaination for why we could but the kid couldn't use swear words. We also however let her punish us by slapping our hand if we let one slip and she caught it. (Much cuter when she was 2.5 and a lot weaker...now she's almost 4 and leaves a mark when she whacks us) If she did say a swear word, usually an eyebrow with 'the look' was enough, but if we had to slap her hand (in actuality, barely a slap, never made it even pink) she'd cry so hard, you think we cut out her tongue.
She recently said 'Oh cricket' in frustration, and now that has become the explative of choice in our house.
Edited to add: I don't believe she has ever said any sear words out of the house. It appears this method worked for us, but out kid is a girl, and there are some definite differences between the sexes. Good luck. Let us know how it turns out!