7/28/2019 __zanders.eu_en_publications_article_how-to-value-a-cross-.pdf

1/1

How to value a cross-currency swap

Lees ook

On swap valuation and overnight ratesIn the past, deriving the market value of an interest rate swap was considered fairly easy. Nowadays,things have changed. Things which once seemed stable are now unstable and a risk-free rate is nolonger without risk. For this reason, the valuation of any type of swap has to change. This article aimsto throw some light on the major developments in the interest-rate derivatives markets, the emergenceof a new methodology, and the underlying complexities in valuing diff erent kinds of swaps.

Zanders is expandingits UK office

Will Basel III force disintermediation?Implications for high risk/high yield banking activities

By: Pierre Wernert

Published: April 22, 2011

Tags: corporates, financial institutions, public sector, value, market value, CCS, cross-currency swap,swap, credit default swap

Since the first transaction in 1981 between the World Bank and IBM, the market of cross-currencyswaps has grown rapidly. It represents, according to the Bank of International Settlements, anoutstanding notional amount of USD 16,347 billion as per June 2010. In this article we will discusshow cross-currency swaps work, and how to value them.

A cross-currency swap (CCS), can have different objectives. It can reduce the exposure to exchangerate fluctuation or it can provide arbitrage opportunities between different rates. It can be used forexample, if a European company is looking to acquire some US dollar bonds but does not want toexpose itself to US dollar risk. In this case it is possible to do a CCS transaction with a US-basedbank. The European company is paying in euros and receives a (fixed) US dollar cash flow. Withthese flows the European company can meet its US dollar obligations. The valuation of a CCS is quite

similar to the valuation of an interest-rate swap. The CCS is valued by discounting the future cashflows for both legs at the market interest rate applicable at that time. The sum of the cash flowsdenoted in the foreign currency (hereafter euro) is converted with the spot rate applicable at that time.One big difference with an interest-rate swap is that a CCS always has an exchange of notional.

Looking at a CCS with a fixed-fixed structure (both legs of the swap have a fixed rate), theundiscounted cash flows are already known at the start of the deal, they are simply the product of thenotional, the fixed rate and the year fraction.

Page 1 of 1How to value a cross-currency swap

24/06/2013http://zanders.eu/en/publications/article/how-to-value-a-cross-currency-swap