Cross-currency Swaps

A CCS is a swap in which CFs are based on different currencies. Unlike an IRS, in a currency swap the notional actually changes hands at the beginning and at the termination of the swap. Interest payments are also made without netting.

 

In reality, market participants have different levels of access to funds in different currencies and therefore their funding costs are not always equal to LIBOR.

 

An approach to work around this is to select one currency as the funding currency, and select one curve in this currency as the discount curve. CFs in the funding currency are discounted on this curve. CFs in any other currency are first swapped into the funding currency via a cross currency swap and then discounted.

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