Cross-currency swap
Quantitative Finance glossary · Quantitative Finance
Definition
Swap exchanging interest and principal cash flows denominated in two different currencies; unlike a single-currency IRS, the principals are exchanged at inception and re-exchanged at maturity at the initial spot. Most commonly traded as a basis swap: floating-vs-floating (e.g. SOFR vs ESTR) with a cross-currency basis spread, s_ccy, that has been persistently non-zero since 2008 (covered-interest-parity violation), reflecting USD funding scarcity and balance-sheet costs. Used by issuers to swap a non-USD bond into a synthetic USD floater.
Cross-currency swap in plain English
A cross-currency swap lets two parties trade streams of interest and principal in different currencies — say one side has euros but really needs dollars, and the other has the opposite need. Unlike a same-currency interest-rate swap, here the actual principal amounts get handed over at the start and swapped back at the end using the original exchange rate, so each side effectively borrows the currency it wants. In theory the two sides should be a fair trade, but since the 2008 crisis there's a persistent extra fee — the 'cross-currency basis' s_ccy — because dollars are scarce and banks find it costly to hold these positions on their books. A common real-world use: a European company issues a bond in euros but swaps it into dollars so it ends up paying in the currency it actually operates in.
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