Glossary

Cross-Currency Swap

Also known as: XCCY swap, Currency swap, XCCY

A derivative in which two counterparties exchange principal and interest payments denominated in two different currencies over an extended term, used to convert an entire stream of foreign-currency cash flows (and often the associated debt) into the investor's home currency.

Where an FX forward hedges a single future cash flow, a cross-currency swap is the instrument of choice for hedging an ongoing, multi-year exposure — typically arising when an investor has borrowed in one currency to fund an asset that generates income in another, or when a fund wants to convert the entire debt service and principal profile of a foreign-currency loan into its home currency for the life of the loan. The structure typically involves an initial exchange of principal at inception, periodic exchange of interest payments (which can each be fixed or floating, giving rise to fixed-for-fixed, fixed-for-floating, or floating-for-floating variants), and a re-exchange of the original principal amounts at maturity, which is what distinguishes it economically from a simple interest rate swap and makes it suitable for hedging currency risk embedded in long-dated cross-border debt. Because the instrument runs for years rather than months, counterparty credit risk and collateral posting terms are a much larger practical consideration than with a short-dated forward, and cross-currency basis — a pricing spread reflecting supply and demand for a given currency pair in swap markets, which can widen sharply during periods of market stress — can make the swap materially more or less expensive than interest rate differentials alone would suggest.