How does a cross-currency swap agreement work?

A cross-currency swap agreement works by the first party borrowing a specific amount of foreign currency from a second party at the current exchange rate. At the same time, the first party lends a corresponding amount of its domestic currency to the counterparty.

What is a cross currency swap?

A derivative contract between two parties, defining the exchange of obligations based on two interest rate indices with distinct currency values. What is Cross Currency Swap? A cross- currency swap is a derivative contract between two parties, defining the exchange of obligations based on two interest rate indices with distinct currency values.

What is the difference between foreign exchange swaps and cross currency swaps?

Leg 2 is the transaction at the predetermined forward rate. Foreign exchange swaps and cross currency swaps differ in interest payments. For a foreign exchange swap to work, both parties must own a currency and need the currency that the counterparty owns. There are two “legs”: The first leg is a transaction at the prevailing spot rate.