Cross-Currency Swap
Also known as: XCCY, Basis swap, CCS
Swap debt from one currency into another for years at a time — principal, interest and all.
- Asset class
- FX / rates derivatives
- Instrument type
- Long-dated swap with notional exchange
- Traded
- OTC
- Typical users
- Bond issuers, banks, supranationals
BeginnerWhat is it, really?
A cross-currency swap is the long-term version of currency borrowing: two parties exchange principal amounts in different currencies, pay each other interest on what they received, and swap the principals back at maturity — five, ten, even thirty years later.
The classic user is a bond issuer borrowing where it's cheap and swapping to what it needs. A German carmaker issues a dollar bond to US investors, then uses a cross-currency swap to convert every dollar cash flow — coupons and principal — into euros. Result: euro debt at (often) a better rate than issuing in euros directly.
Unlike an interest rate swap, the notionals here are real and exchanged — this is genuine funding, not just a rate bet.
IntermediateHow it works in practice
The standard contract
- Structure: float-vs-float (SOFR vs €STR, etc.) + a basis spread on one leg — the price of the swap. Fixed-fixed versions bolt on ordinary IRS.
- Notional exchange: at start and maturity at the same FX rate — this is what distinguishes it from a strip of FX forwards economically (interim interest flows).
- Mark-to-market resets: modern interdealer contracts reset the notional quarterly to current FX, slashing counterparty exposure.
The basis spread — the market's price of currency funding
EUR/USD basis at −25bp means: a party swapping euros into dollars must accept €STR minus 25bp on its euro leg — paying up for dollars. The basis exists because demand to fund in dollars structurally exceeds supply; it is the multi-year cousin of the FX swap basis.
Issuer arithmetic
"Funding advantage" = (spread achieved in foreign market) − (domestic spread) ± basis. Supranationals (World Bank, EIB) are the masters: they issue in whichever currency is momentarily cheap, swap everything back, and pass savings on — a major reason exotic-currency bond markets exist at all.
AdvancedPricing & valuation
Valuation in a multi-curve world
Each leg discounts on its currency's OIS curve, converted at spot; the basis \(b\) makes the package price to par at inception:
Consistency requires collateral-aware discounting: a USD-collateralised EUR leg discounts on the EUR-curve-implied-from-USD-collateral ("cheapest-to-deliver collateral" curves) — one of the more intricate corners of modern curve building.
Risk profile
- FX delta: the final notional exchange is a huge long-dated FX forward — non-MTM swaps carry large, growing exposure (why resets became standard).
- Basis risk: its own bucketed DV01 per tenor; basis curves move on issuance waves, hedging flows and regulatory dates.
- xVA-intensive: long tenors + notional exchange = the heaviest CVA/FVA/KVA product on most desks; pricing to corporates varies materially by CSA terms.
What moves the basis
Structural hedging demand (Japanese lifers, European pensions with dollar assets), issuance arbitrage flow in the opposite direction (reverse Yankees), dealer balance-sheet costs, and central-bank actions. The basis is mean-reverting-ish but regime-prone: −150bp in 2008 EUR/USD, ~0 when issuance arbitrage balances flows.