Cross Currency Swap 18-Jan-2015

Cross Currency Swap (CCS, X Ccy Swap) is a financial instrument. It must be familiar with interest rate traders, and some of you learned in financial engineering course at the university.


This kind of swap is dealt for risk hedging purpose when banks issue their structured bond. One of the typical cases is that an European bank want be funded by Asian investors. Asian investors may invest in their local currency while the European bank want EUR or own currency. In this case, the European bank offers products in Asian local currency and hedges in cross currency swap, EUR vs JPY for example. The swap counter party could be investment banks or market brokers.

Cross currency swap provide some sense of currency exchange. Reminding CHF jump last week, traders who had USD/CHF cross currency swap must have had their Marked to Market jumped. The figure describes an example of cross currency swap in USD vs CHF. In this figure, Entity B pays CHF to Entity A up to the maturity against USD.

Size of the deal by investment banks is huge as their customers include the biggest companies in the world, and if some of them tend to have the positions like Entity B, their Marked to Market is disastrously degraded. Some of loss have not been realized yet, the positions still being held. The impact may be gradually appeared in coming months, probably capital requirement for the banks could be burden as some of them cover their losses.