Cross Currency Swap Theory & Practice - An Illustrated Step-by-Step Guide of How to Price Cross Currency Swaps and Calculate the Basis Spread

26 Pages Posted: 12 Nov 2018 Last revised: 28 Mar 2019

See all articles by Nicholas Burgess

Nicholas Burgess

University of Oxford, Said Business School

Date Written: November 11, 2018

Abstract

A Cross Currency Swap (CCS) is a financial instrument that allows investors to exchange a set of cashflow liabilities for an equivalent set in another currency, often USD. Investors trade CCS to secure cheaper funding, hedge FX exposures, manage liquidity risk and of course for speculative purposes.

In this paper we review the CCS product, its features and risks. We show how to price CCS and provide the mathematical formulae with examples & illustrations. Furthermore we outline how to calculate the CCS Basis Spread, which is how CCS are quoted in the financial marketplace.

Keywords: Cross Currency Swaps, Marked-to-Market, Notional Resetting, Counterparty Credit Risk, CSA, Collateral Posting, FX Forward Rates, Present Value, Pricing, Par Spread, Basis Spread

JEL Classification: C02, G12, G15, G21, G31, G32

Suggested Citation

Burgess, Nicholas, Cross Currency Swap Theory & Practice - An Illustrated Step-by-Step Guide of How to Price Cross Currency Swaps and Calculate the Basis Spread (November 11, 2018). Available at SSRN: https://ssrn.com/abstract=3278907 or http://dx.doi.org/10.2139/ssrn.3278907

Nicholas Burgess (Contact Author)

University of Oxford, Said Business School ( email )

Oxford, OX1 5NY
United Kingdom

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