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What is a cross-currency basis swap?

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

What is a cross-currency basis swap?

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

I want to send

to

Min. Transfer Amount Transfer Speed Online Transfer Fee Rate Amount Received Description CTA Details
$0 3 - 5 days - - Save your business time and money with XE. Go to site Show details
$1 3 - 5 days USD 1.00 20.236 MXN 101,162 Enjoy high maximum transfers into more than 20 currencies while saving up to 90% over local banks. Go to site Show details
$2,000 3 - 5 days USD 0.00 20.168 MXN 100,838 No-limit transfers with competitive exchange rates for 100+ currencies. Go to site Show details
Same day USD 0.00 20.077 MXN 100,383 Increase business efficiency with zero transaction fees and same-day transfers. Go to site Show details

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I want to send

to

Min. Transfer Amount Transfer Speed Online Transfer Fee Rate Amount Received Description CTA Details
USD 0 3 - 5 days USD 0.00 20.066 MXN 100,332 Transfer up to $500,000 with no minimums and no fees. Go to site Show details
USD 1,000 1 day USD 0.00 20.056 MXN 100,281 No maximum limit, no fees and competitive exchange rates for 100+ currencies. Go to site Show details
USD 1 1 - 2 days USD 7.00 20.077 MXN
100,242
Enjoy high maximum transfers into more than 20 currencies while saving up to 90% over local banks. Go to site Show details
USD 1 Within an hour USD 3.99 20.036 MXN 100,100 Use promo code FINDER to send your first transfer with no fee.
Send to 110+ countries for bank-to-bank deposit, cash pickup or mobile top-up.
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1 - 2 days USD 0.00 20.016 MXN 100,079 Get live quotes on exchange rates and take advantage of no transaction fees with no limits on transfers. 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.

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