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Cross-currency swap

A long-dated agreement to exchange principal and interest payments in two currencies, used by borrowers to raise money in one market and service it in another.

Unlike an fx-swap, which is short-dated and exchanges principal only at the ends, a cross-currency swap runs for years and exchanges interest throughout. A European company that can borrow cheaply in euros but needs dollars issues euro bonds and swaps the proceeds and coupons into dollars.

Demand for these swaps is what creates the cross-currency-basis, a spread that shows how badly the market wants one currency's funding against another.

Example: a firm issues EUR 500,000,000 of five-year bonds at 3.4% and swaps into dollars at 1.0840, receiving $542,000,000 and paying a dollar rate of roughly 5.1%. Its euro coupons are covered by the swap counterparty.

Related: fx-swap, cross-currency-basis

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