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What is a cross-currency basis swap?

A cross-currency basis swap is a foreign exchange derivative that could let you acquire foreign currency at a better price.

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How cross-currency basis swaps work

When you enter into a cross-currency basis swap, you:

  • Borrow an amount of currency from another party, and
  • Lend the equivalent amount in a second currency to that party at the same time.

While the swap is active, you exchange floating interest rate payments with the other party. At the end of of the swap, you and the other party return the money you’ve borrowed from each other at a prearranged exchange rate.

What is a floating interest rate?

A floating interest rate moves with a market or an index, as opposed to a fixed interest rate that stays the same throughout the duration of a loan.

The floating interest rate is also known as a variable rate or adjustable rate.

Why is a cross-currency basis swap useful?

Cross-currency basis swaps are often used by financial institutions and corporations to:

  • Obtain foreign currency to pay for overseas assets.
  • Acquire foreign currency bonds as investments.
  • Raise foreign money through bonds.

Cross-currency basis swaps: An example

Let’s say you run a business in the United States but want to buy a warehouse in Italy.

You take out a mortgage on the warehouse that requires mortgage payments in euros. But because your company is in the US, you primarily receive dollars when conducting business.

This requires you to convert your dollars to euros to pay your mortgage in Italy.

Unfortunately for you, the dollar is weakening against the euro. That means your mortgage payments are getting more expensive.

A cross-currency basis swap may help. What it does is allow you to borrow dollars and convert them into euros at a fixed rate. It effectively lets you take out a loan and make interest payments in dollars — your home currency — rather than euros.

Compare providers that can help you set up cross-currency basis swaps

Min. Transfer Amount Transfer Speed Online Transfer Fee Rate Amount Received Description CTA Details
$0 Same day USD 0.00 20.759 MXN 103,793 Save your time and money with XE Money Transfer for business. Go to site Show details
$1,000 1 day USD 0.00 20.654 MXN 103,271 Business customers: Send safe, no-limit transfers with no fees and competitive exchange rates. Go to site Show details
GBP 5,000 Same day USD 0.00 20.654 MXN 103,271 Increase business efficiency with zero transaction fees and same-day transfers. Go to site Show details

Compare up to 4 providers

Min. Transfer Amount Transfer Speed Online Transfer Fee Rate Amount Received Description CTA Details
$1,000 1 day USD 0.00 20.654 MXN 103,271 OFX has no maximum limit transfers, with competitive exchange rates for 45+ currencies. Go to site Show details
GBP 1,000 1 - 2 days USD 0.00 20.654 MXN 103,271 Exclusive: Minimum transfer of $1,000 for Finder readers (normally $5,000).
CurrencyTransfer lets you shop around for the best exchange rate on its online marketplace.
Go to site Show details
$1 Same day USD 0.00 20.769 MXN 103,845 XE has fast transfers with no fees and a range of foreign currency tools. Go to site Show details
$10 Within an hour USD 1.99 20.446 MXN 102,187 Special offers like free transfers and better exchange rates available for new customers.
Remitly has quick, affordable transfers around the world, with both express and economy options.
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$1 Within an hour USD 3.99 20.775 MXN 103,793 WorldRemit sends money to 110+ countries for bank-to-bank deposits, cash pick-ups or mobile top-ups. Go to site Show details

Compare up to 4 providers

Are there any drawbacks?

In a cross-currency basis swap, you’re exposed to credit risk, because the other party could default, and interest rate risk, given that interest rates fluctuate.

Frequently asked questions

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