What is a Cross Currency Swap?
A cross-currency swap is an interest rate derivative whereby
one currency is used as collateral for another currency. In simple terms, it is
an interest-bearing bond, equity swap, or an interest swap covering multiple
currencies simultaneously. It is priced using a markup. For instance, one euro
is used as security while another euro is used as an asset to be purchased at a
later date. learn more from Harbourfront Technologies.
When a cross-currency swap is made, the two currencies are chosen which can be different from the target country. In the case of a Euro to British pound (GBP), this would yield a higher rate of return than if you were to make the switch to a USD-based swap. This is because the amount of risk associated with a cross-currency swap is not as great in relation to that associated with a base currency or foreign currency. This is because there is no single central agency or commission trading the cross-currency swap due to interest rate hedge tax treatment.
There are different types of cross-currency swap. The two most common are the interest-bearing and the non-interest-bearing cross-currency swap. The interest-bearing is usually chosen as a hedge against fluctuations in currencies. While there are no risks taken with the non-interest-bearing cross-currency swap.
A cross-currency swap is used as an alternative to a standard index. For instance, the GIC (Great East Asia) and the USD (USD - United States) are the two standard benchmarks used to determine international interest. By switching to a cross-currency swap an investor can benefit from two currencies by trading in both simultaneously. They will only be paying for the difference in value between their two investments instead of paying interest on the entire amount. These are also commonly known as double-entry cross-currency swaps or double entry swaps.
There are many brokers that offer these services. The most common way to find them is through the internet. However, it is also possible to find brokers by phone and request a free quote. Once this information is provided, it may be necessary to contact them via email. The most common way to perform all of these functions is online though.
Many traders use a cross-currency swap to protect their principal investment. If the value of one currency should decrease, they would sell back their principal currency in the other direction to cover the loss. When the value increases, they would buy back the currency that has lost in value. This allows them to have an asset that is secure and gives them an asset to protect their principal investment. It is a method of achieving a diversified asset portfolio.