In the interbank market, cross currency swaps are generally quoted and traded as floating to floating basis. Swaps meaning both legs pay a floating interest rate in their respective currencies. However, many clients such as corporates or investors managing fixed rate liabilities often need fixed-to-floating or fixed-to-fixed structures. Since these are not directly quoted in the market, banks construct them by combining different swap instruments. To illustrate, let's consider a client who wants a fixed-to-fixed euro US dollar cross currency swap. The bank provides a single all in quote, but internally this is achieved by layering multiple trades. The starting point is a standard cross currency basis swap, which exchanges floating euro against floating USD. However, the client needs a fixed rate in euro and a fixed rate in USD. To achieve this, the bank adds two separate interest rate swaps, one in euro and one in USD.
To convert the floating euro leg into a fixed rate, the client simultaneously enters into a standard euro interest rate swap. In the swap, they pay a fixed euro rate and receive floating euro, which cancels out the floating euro leg of the cross currency swap. Similarly, on the US dollar side, the client enters into a USD interest rate swap, where they receive a fixed USD rate and pay floating USD offsetting the floating USD leg of the cross currency swap.
By structuring the trade, this way, the client gets a clean, fixed-to-fixed, or fixed-to-floating solution without having to manage multiple transactions. Meanwhile, the bank internally offsets its risk using market traded instruments, ensuring efficient execution and pricing. This ability to customize structures while maintaining efficient risk management makes cross currency swaps a valuable tool for clients with specific funding and hedging needs.
