A currency swap, sometimes called a currency cross swap, involves the exchange of interest – and sometimes capital – in one currency for the same currency to another. Interest payments are exchanged on fixed dates for the duration of the contract. It is considered a foreign exchange transaction and is not legally required to be recorded on a company`s balance sheet. At the beginning of the swap, the corresponding amounts of capital are exchanged in cash. Most of them expose users to market risks. The value of an XCS changes when market rates, exchange rates, and XCS rates rise and fall. In market terminology, this is often referred to as a delta and base risk. Other specific types of market risks to which interest rate swaps are exposed are single currency risks (for which different IBOR base indices may differ) and reset risks (for which the publication of certain tenor IBOR indices is subject to daily fluctuations). XCS also have gamma risk, their Delta risk, base risks or FX commitments increase or decrease in the event of a fluctuation in market rates. In the case of a cross-currency swap or an FX swap, counterparties exchange specified amounts in both currencies. For example, one party could receive £100 million (GBP) while the other will receive $125 million. This implies a GBP/USD exchange rate of 1.25. At the end of the agreement, they will exchange again and conclude the agreement, either at the initial exchange rate or at another rate agreed in advance.
One approach is to choose a currency as the funding currency (for example. B USD) and choose a curve in that currency as the discount curve (for example. B USD interest rate curve against 3M LIBOR). Cash flows in the refinancing currency are discounted on this curve. Cash flows from any other currency are first transferred to the funding currency through a cross-credit swap and then discounted.  See Zinsswap § Valuation and pricing for further discussion, as well as a description of the structure of the corresponding curve. In many cases, one of the parties pays a fixed interest rate and the other a variable rate, but both could pay fixed or variable interest rates. . .