Currency and FX Swaps · Swaps Trading Guide

Cross currency swaps can exchange both interest and principal. Mapping each currency separately prevents a net total from hiding a real payment obligation.

Start with each party’s obligation

Imagine a borrower that owes dollars but earns euros. A suitable swap might receive dollar interest and principal while paying euro interest and principal. Combined with the debt, that can transform the currency profile. The starting exchange, loan proceeds and final repayment must be aligned, otherwise the package leaves an unhedged currency amount.

Calculate coupons in their own currencies

Assume a simplified contract with EUR 10,000,000 and USD 11,000,000 notionals. An annual euro coupon of 3% equals EUR 300,000. An annual dollar coupon of 4% equals USD 440,000. These amounts cannot simply be subtracted as though both were dollars. A reporting conversion does not change the contractual settlement currency.

Understand principal resets

A constant notional contract keeps the agreed currency principal amounts. A resetting structure can adjust a notional using observed exchange rates and generate intermediate exchange payments. This changes funding needs and the distribution of currency risk. Identify the fixing date, reset formula and settlement lag for every reset.

Reconcile the complete package

Check that debt and swap coupons use compatible benchmarks, dates and day counts. A mismatch can leave basis risk even when the principal amounts match. Include collateral in the cash plan, because a hedge can offset economic exposure while still requiring cash before the hedged asset produces it.

Try it yourself

A half year coupon pays 2.8% on EUR 6,000,000 using an accrual fraction of 0.5. What is due?

Show the worked answer

EUR 84,000. A separate dollar coupon needs its own notional, rate and accrual fraction. The two payments are not automatically eligible for net settlement.

Further reading

Educational material, not a recommendation to transact. Numerical examples are hypothetical and simplify contract terms. Access, documentation, collateral and regulatory requirements depend on the product, jurisdiction and counterparties.

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