What is a cross-currency basis swap, and how would a treasurer use one to fund a foreign-currency asset or debt?
An advanced Corporate Treasury question — expect it in final rounds and case-heavy interviews (IB, PE, Big-4 Transaction Services).
THE SHORT ANSWER
A cross-currency swap exchanges principal and interest in one currency for principal and interest in another, with notional re-exchanged at maturity — effectively converting a liability or asset from one currency to another while hedging both FX and interest-rate risk. A treasurer who raises cheap debt in their home currency but needs to fund a foreign-currency asset (or a foreign subsidiary) can swap the proceeds into the target currency, locking the all-in foreign-currency funding cost and removing FX exposure on principal and coupons. The nuance is the cross-currency basis: supply/demand for one currency's funding versus another adds a spread (the basis) on top of interest-rate differentials, so the swap isn't free — the basis can make synthetic foreign funding cheaper or dearer than issuing directly in that currency.
WHAT INTERVIEWERS LISTEN FOR
- ✓Swaps principal + interest across currencies, re-exchanged at maturity
- ✓Hedges FX and rate risk to fund a foreign asset/debt
- ✓Locks all-in foreign-currency funding cost
- ✓Cross-currency basis adds a spread beyond rate differentials
COMMON MISTAKES
- ✗Confusing it with a plain FX forward
- ✗Ignoring the cross-currency basis
- ✗Forgetting principal re-exchange
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