Definition
Currency Swap vs Cross-Currency Swap
An FX swap exchanges principal at two dates with no interim interest, while a cross-currency swap exchanges both principal and periodic interest payments in two currencies over years.
A short-dated FX swap is essentially a financing tool with two legs and no coupon exchange. A cross-currency swap is a longer-dated instrument where two parties also swap interest streams, for example paying USD LIBOR/SOFR-linked interest and receiving rupee-linked interest.
Indian companies that borrow abroad through external commercial borrowings (ECBs) often use cross-currency swaps to convert dollar debt servicing into rupee terms, neutralising both interest-rate and exchange-rate risk on the loan.
Related terms
- Currency Swap (FX Swap)An FX swap is a simultaneous agreement to buy a currency at the spot rate and sell it back at a forward rate (or vice versa), used to manage short-term funding and liquidity.
- USDINRUSDINR is the exchange rate of the US dollar against the Indian rupee, the most-watched currency pair in India and a key barometer of capital flows and import costs.
- Hedging Forex RiskHedging forex risk means using forwards, futures, options or swaps to lock in or limit the exchange-rate cost of future foreign-currency cash flows.
- External Commercial Borrowing (ECB)External commercial borrowings are foreign-currency or rupee loans raised by eligible Indian companies from non-resident lenders under RBI's framework, subject to cost and end-use limits.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.