Key Takeaway
A cross-currency swap helps convert foreign loan payments into your local currency.
It reduces risk from exchange rate and interest rate changes.
It’s best suited for medium to long-term loans, not ideal for short-term or small financing.
Say you run a green tea import business in the US. To strengthen your supply chain, you help finance a factory expansion in Indonesia with a loan in rupiah.
But your revenue is in US dollars.
If the rupiah strengthens or Indonesian interest rates rise, your repayments suddenly cost more, turning a good financing decision into a source of risk.
That’s where a cross-currency swap comes in. It lets you convert those loan payments into USD, giving you stable, predictable costs, no matter what happens to the exchange rate.
In this guide, we’ll cover:
✅How cross-currency swaps work (with an example)
✅Benefits and risks every entrepreneur should know
✅When to use them, and when not to
✅How cross-currency swaps differ from FX swaps
Let’s get started.
What Is a Cross-Currency Swap?
A cross-currency swap is a financial agreement that helps businesses manage the risks of dealing with multiple currencies.
If you borrow money in one currency but earn revenue in another, changes in exchange rates or interest rates can make your repayments unpredictable. A cross-currency swap solves this by allowing you to “swap” your loan payments into your currency, so your costs stay stable, even if the market shifts.
It doesn’t change the original loan, but it helps make it feel like the loan is in your domestic currency.
This makes cross-currency swaps a useful tool for businesses that operate internationally or finance projects across borders.
New to FX? Read our article on what the foreign exchange market is and how to reduce currency exposure.
How Does a Cross-Currency Swap Work?
A cross-currency swap is an agreement in which two counterparties exchange funds in different currencies and then pay interest to each other over a set period.
Here’s a simple breakdown of how it works:
- Initial Exchange
Each counterparty gives a set amount of money in their local currency. The exchanged amounts are based on the agreed exchange rate at the time. - Ongoing Interest Payments
Each side pays interest on the money they received, in that currency. These payments usually happen every 3 or 6 months. - Final Exchange
At the end of the swap (which could last 1 to 10+ years), the counterparties return the original amounts to each other.
This setup is often used when a business takes a loan in a foreign currency but earns money in its local currency. Without a swap, fluctuations in exchange or interest rates could make repayments unpredictable. This type of FX derivative helps fix that problem by locking in more stable, reliable payments.
Types of Cross-Currency Swaps:
Because these swap transactions are customised, they can take different forms:
- Fixed vs Fixed – The counterparties pay fixed interest rates.
- Floating vs Floating – Both pay variable rates tied to market benchmarks.
- Fixed vs Floating – One pays a fixed rate, the other a floating rate.
These transactions give businesses more control over international borrowing, especially when interest rate or currency risk is a concern.
Next, let’s look at an example to see how this works in practice.
Use Case: Wine Importer From Hong Kong
Let’s say a wine importer in Hong Kong wants to buy vineyards in France. The business secures a 5-year loan of EUR 1 million from a European lender.
But here’s the challenge:
- The business earns in HKD, not EUR. If the EUR strengthens over time, the company will have to pay back more in HKD than expected.
- Also, if interest rates in Europe go up, loan repayments could increase.
How the Cross-Currency Swap Helps
Initial exchange
- The business receives EUR 1 million from the bank
- It gives the bank HKD 8.5 million, based on the exchange rate at the time (8.50)
During the 5 years
- The business pays EUR interest to the bank (e.g. based on EUR market rates)
- The bank pays HKD interest to the business (e.g. based on HKD market rates)
Final exchange at maturity (after 5 years)
- The business pays back EUR 1,000,000
- The bank returns HKD 8,500,000 to the business
Even though the actual loan is in euros, the business has effectively turned it into a liability that behaves like it’s in Hong Kong dollars. This way:
- The company is protected from large changes in the EUR/HKD exchange rate.
- It can better match its HKD revenue with its loan obligations.
Benefits of Cross-Currency Swap
Cross-currency swaps can offer strategic advantages for businesses operating across borders. Key benefits include:
- Dual Risk Management: Helps manage both currency risk and interest rate risk in one instrument.
- Predictable Cash Flows: Especially when using fixed-rate terms, making budgeting easier.
- Customisable Terms: Swap agreements with banks can be tailored to suit your specific needs, including currencies, tenors, and interest types.
Risks of Cross-Currency Swaps
Despite their benefits, cross-currency swaps also come with important risks to consider.
- Structural Complexity: More complex than spot trade or simple forward contracts, often requiring financial expertise.
- Credit Requirements: May involve collateral or depend on the counterparty's creditworthiness.
- Market Value Fluctuations: Swap values can shift significantly with market movements (known as mark-to-market risk).
- Limited Liquidity: These contracts are hard to unwind early without incurring costs or renegotiations.
When Should You Consider a Cross-Currency Swap?
A cross-currency swap could be a good strategy if your business fits one or more of these scenarios.
- You’re borrowing in a different currency from the one you earn revenue in.
- You want stable and predictable repayments in your home currency.
- You have medium to long-term financing needs (typically 1–10+ years).
- You’re dealing with loan sizes or volumes large enough to justify the complexity and setup costs.
Tip: Learn practical FX risk management strategies in our detailed guide.
What Is the Difference Between FX Swaps and Cross-Currency Swaps?
While both derivatives involve exchanging currencies, FX swaps and cross-currency swaps serve different purposes, timeframes, and levels of complexity. Here’s a side-by-side comparison:
| Feature | Cross-Currency Swap | FX Swap |
|---|---|---|
| Duration | Medium to long term (1 to 10+ years) | Short term (typically days to a few months) |
| Purpose | Manage both currency and interest rate risk | Manage short-term currency needs (e.g., cash flow) |
| Interest Payments | Yes — both counterparties pay interest in the currency they received | No — only an exchange and re-exchange of principal |
| Complexity | High — requires documentation, margining, and often advisory input | Low — simple and straightforward |
| Typical Use Case | Hedging long-term loans or liabilities in foreign currencies | Accessing short-term FX liquidity or rolling contracts forward |
Helpful: Read our FX swaps guide for more details.
Final Note
Cross-currency swaps are a great tool, but not for every business. If you're managing long-term debt in foreign currencies, they may offer valuable protection. Always consult a financial advisor to evaluate if it's the right fit for your financing structure.
FAQs
What type of hedge is a cross-currency swap?
A cross-currency swap is a long-term hedge used to manage both foreign exchange risk and interest rate risk. It's typically used when a business borrows in one currency but earns revenue in another.
