What is a cross-currency swap?

A cross-currency swap (CCS) is a financial derivative used by institutions, companies and investors to exchange interest payments and principal amounts in two different currencies.

In a deliverable CCS, the notional principals are typically exchanged at the start and then re-exchanged at maturity at a pre-agreed rate, with each party also paying interest in the other’s currency.

In a non-deliverable CCS (NDCCS), there is no physical exchange of principals; instead, both principal and interest cash flows are net-settled in a single currency (commonly USD).

Global corporate treasuries frequently use CCS instruments as hedging tools against both currency and interest rate risks. StoneX Markets also offers protection against interest rate volatility and adverse movements with interest rate swaps.

How does a cross-currency swap work? 

In general, cross-currency swaps (CCS) involve the initial exchange of principal and periodic interest payments in different currencies, followed by a re-exchange of principal at maturity. In some cases, however, principal-only swaps are used, where the two parties exchange notionals at maturity without exchanging interim interest flows.

For example, suppose a company wants to borrow €50 million for 5 years but prefers not to have Euro exposure. Instead, it issues USD bonds for $55 million and enters into a CCS with a European bank. Under the CCS:

• The company exchanges $55m for €50m at inception.
• It pays interest in euros on €50m while receiving interest in dollars on $55m.
• At maturity, the principals are re-exchanged, with €50m swapped back for $55m.

The effect is that the company raises euro funding while servicing a USD bond, effectively transforming its USD cash flows into euro cash flows. This hedges its FX risk and converts its interest rate exposure from USD to EUR, which is a vital part of cash management.

What is a cross-currency swap spread? 

A cross-currency swap (CCS) spread — often called the cross-currency basis — represents the extra premium or discount required on one leg of the swap (typically the non-USD currency) to make the swap fair. In practice, this means that one party will pay, for example, EURIBOR + X basis points against receiving SOFR flat.

The spread reflects relative funding costs, market liquidity, and supply–demand imbalances between the two currencies. It can be positive or negative depending on conditions, and it persists even though covered interest parity (CIP) would predict no arbitrage. While benchmark rates such as SOFR, EURIBOR, or TONA anchor the floating legs, the basis spread adjusts for real-world market frictions, liquidity, and funding pressures.

How are cross-currency swaps used? 

In general, cross-currency swaps (CCS) are used by companies and financial institutions to manage currency risk and optimize funding costs when accessing capital. A CCS involves exchanging principal and interest payments in two currencies over time, which allows borrowers to convert their funding into the desired currency, hedge against exchange rate fluctuations, and potentially lower borrowing costs compared with issuing debt directly in that market.   

Additionally, StoneX Debt Capital Markets’ helps middle market companies grow, recapitalize and acquire new assets via strategic debt capital and leveraged financing solutions. Read more about how we deal with structuring debt solutions to meet your financing needs.

Hedging currency risk 

Currency risk is the potential for losses arising from fluctuations in exchange rates. Businesses and investors often mitigate this risk through currency hedging strategies, using derivatives such as forward contracts, options, or swaps. Forwards can lock in an exchange rate, options provide protection with flexibility, and swaps can convert exposures from one currency into another. When implemented effectively, hedging reduces uncertainty, supports more predictable cash flows, and helps protect profit margins from adverse currency moves.

StoneX Pro is your gateway to FX hedging in the global economy. We support corporates and institutions with institutional-grade FX market access and provide a comprehensive suite of FX products across 65+ currency pairs including emerging markets.

Accessing foreign markets 

When a management team is looking to access foreign markets, they can deploy numerous strategies to expand their business operations beyond the domestic borders allowing for increased revenue, diversification, and global reach. The common strategies for expansion include exporting, licensing, franchising, joint ventures and making direct investments. Prior to making major financial commitments, each management team must assess the varying levels of risk, control and investment required to justify entering these foreign markets. 

Optimizing funding costs 

Optimizing funding costs involves managing how a business funds its operations and investments to minimize borrowing costs and maximize financial efficiency. This includes exploring various funding sources, negotiating favorable terms and optimizing spending to reduce a reliance on external funding. 

Advantages and disadvantages of cross-currency swaps

Cross-currency swaps (CCS) offer both businesses and investors important advantages as well as some drawbacks. On the positive side, they can hedge currency risk, help optimize funding costs, and transform interest rate exposure from one currency to another. When used strategically, CCS also allow companies to align debt obligations with revenue streams and tap into global capital markets more effectively. However, these benefits must be weighed against potential disadvantages such as basis spreads, counterparty risk, and transaction complexity.

Disadvantages of cross-currency swaps 

While cross-currency swaps (CCS) can protect against exchange rate fluctuations and potentially improve funding costs, they also come with several disadvantages. Key risks include counterparty default, limited liquidity that makes it difficult to unwind or exit a swap and market volatility that affects the swap’s mark-to-market value. In addition, CCS contracts are often complex to structure and manage, with significant operational and legal requirements. Other drawbacks include exposure to fluctuations in the swapped-currency interest rate, basis risk, and ongoing monitoring and compliance costs.

Example of a cross-currency swap 

A cross-currency swap (CCS) is particularly useful when natural counterparties exist — for example, a U.S. company that wants to borrow in U.S. dollars but earns most of its revenues in British pounds, and a U.K. company that wants to borrow in British pounds but earns most of its revenues in U.S. dollars. Under a CCS agreement, the two firms exchange principal amounts at an agreed FX rate at inception (USD for GBP). Thereafter, the U.S. company pays interest in pounds on the GBP it has received, while receiving interest in dollars on the USD it delivered. At maturity, the principals are re-exchanged at the same FX rate.

This arrangement allows each company to fund itself in its home market while aligning its debt service with its revenue stream, reducing currency risk.

Cross-currency swap vs FX swap 

While they might seem similar, a cross-currency swap differs both in purpose and structure to an FX swap. A cross-currency swap involves a combination of two loans in different currencies with periodic interest payments exchanged between the two parties including a final exchange of the principal. On the other hand, an FX swap involves two simultaneous transactions, a spot exchange and a forward exchange with no exchange of interest payments between the parties. The goal is to manage short-term liquidity needs or hedge currency risk in the short term rather than locking in longer-term funding and interest rate arrangements like a CCS.  

What are the risks of cross-currency swaps? 

While useful for managing international finances and currency risk, cross-currency swaps carry several potential risks including counterparty risk, interest rate risk, basis risk, liquidity risk and mark-to-market volatility. In addition, operational risks like trade booking errors, valuation discrepancies and settlement failures can also be material. Regulatory requirements (such as uncleared margin rules) including complex structuring and monitoring can all contribute to higher transaction costs.

Can cross-currency swaps be cleared? 

Yes, cross-currency swaps can be cleared using central counterparties, however this is a recent phenomenon because historically they have always been primarily traded using two direct parties.

What is the settlement risk in a cross-currency swap? 

Settlement risk involves the possibility that one party will fail to deliver the agreed currency to the other party as agreed. When such a failure occurs, it could trigger a loss of the principal amount from the party that honors the agreement and delivers its currency without reciprocity. This risk also carries a timing factor where the timing difference in payment across different time zones can create a window for potential default.

How is a cross-currency swap calculated? 

A cross-currency swap (CCS) is valued by projecting and discounting all cash flows in the two currencies, including the initial and final exchange of principal and the interim interest payments.

To calculate:

1. Establish the principal amounts to be exchanged, linked by the agreed spot FX rate.
2. Define the interest payment schedules for each leg (e.g., SOFR vs EURIBOR), which may be fixed or floating.
3. Project future cash flows for both legs.
4. Discount each currency’s cash flows using the relevant discount curve.
5. Convert into a single currency using FX forward rates.
6. The fair (par) CCS spread is the basis adjustment that equates the present value of both legs.

This ensures the swap has zero value at inception.

How are foreign exchange swaps settled? 

A foreign exchange swap is settled through a combination of initial and final principal exchanges, along with periodic interest payments at a predetermined exchange rate. The settlement process involves a payment-versus-payment mechanism like those used by CLS (Continuous Linked Settlement), to mitigate settlement risk. 

What is the margin on a cross-currency swap? 

A margin on a cross-currency swap is the minimum collateral that needs to be deposited to mitigate credit risk. The deposit ensures that one party can cover potential losses if the other defaults. The amount of margin required varies based on the swap’s maturity and other factors. Depending on the regulatory framework, this may include variation margin (daily mark-to-market) and initial margin (for uncleared swaps).