A MEANING OF CROSS-CURRENCY SWAPS (XCCY SWAPS)
Currency swaps are over-the-counter derivatives, and are similar to interest rate swaps covered already in this volume except that in cross-currency swaps the principal amounts are in different currencies. Also, unlike interest rate swaps, cross-currency swaps can involve the exchange of the principal. Even where there is no exchange of principal, the counterparties are subject to the foreign exchange rate fluctuation during the substance of the trade. Cross-currency swaps can also mean a simple currency swap, also known as an FX-swap. But in this chapter the term “cross-currency swap” is used to mean a cross-currency interest rate swap.
A cross-currency swap is a foreign-exchange contract between two parties to exchange principal and/or interest payments of a loan in one currency for an equivalent loan in another currency. A cross-currency basis swap is an exchange of a fixed or floating rate note in one currency for a fixed or floating rate note in another currency. It may involve swapping payments in one currency for payments in another. At maturity the notional principal may also be swapped.
Features of cross-currency swap
The tenure of a cross-currency swap typically ranges from one to fifteen years. Cross-currency swaps are suitable for entities that have loan commitments denominated in one currency, while the revenues generated by the entity are denominated in a different currency, resulting in a currency mismatch between the ...