Let's look at a specific example of a dealer to client cross currency swap.

Suppose a client has a five year loan in Euro, but wants to achieve the same economic effect as borrowing in US dollars, without actually taking out a separate US dollar loan. This can be done using a five year cross currency swap where the client delivers euros and receives US dollars from the cross currency dealer. This initial exchange of principle takes place at the spot FX rate at the time of trade inception. With this exchange, the client now has US dollars to use while the dealer holds the euros.

In the second phase, the client and the dealer exchange interest rate payments at regular intervals. The client pays the agreed US dollar interest rate on the borrowed US dollars, and in return receives the agreed euro interest rate on the invested euros. The notional amounts remain unchanged throughout this period. Importantly, the euro interest payments the client receives can be used to cover the interest due on the original euro loan. This ensures that the client effectively only pays US dollar interest throughout the life of the swap. At the maturity date, the initial principle exchange is reversed as the client needs the euros to repay the five year euro loan. But what FX rate is used? Since the main purpose of a cross currency swap is to synthetically exchange amounts and interest payments from one currency to another without taking exposure to FX rate movements, it makes sense that the final exchange should happen at a pre-agreed rate. At first glance, it might seem logical to use the five year forward rate for the final exchange. After all, ethics forwards reflect the interest rate differential between two currencies over time.

However, in a cross currency swap, these interest rate differentials are already accounted for in the regular exchange of interest payments during the life of the swap. That's why the final principle exchange happens at the same spot FX rate that was used at the start of the trade.

This ensures that the client returns the exact US dollar amount originally received and gets back the exact euro amount originally delivered, allowing them to fully repay their euro loan.