Cash Flow Mechanics of Resettable Cross-Currency Swaps

# resettable/MtM cross currency swaps


# resettable/MtM cross currency swaps












I am trying to understand the mechanics of resettable xccy basis swaps and put together a numerical example. I'd like to know if 1) periodic interest payments are calculated on the original notional exchanged at inception or at the reset notional? 2) at expiry how is determined the notional to be exchanged back (at the final FX rate or start FX rate)?

EURUSD xccy swap with 2 reset dates between inceptions and expiry.

EURUSD rate:

start 1.20 first reset date 1.25 second reset date 1.10 expiry 1.40

Notional = $1000

I assume rates are fixed for the sake of simplicity

USD rate = 3% EUR rate = 1% basis = 0.5%

From the prospective of the USD lender I get below cash flows:

start (FX rate = 1.2)

Notional exchange -$1000 +€1200

first reset date (FX rate = 1.25, increase of 4.2%)

Notional adjustment €1200 * 4.2% = €50

Interest received $1000 * 3% = 30 dollars Interest paid -€1200 * (1% -0.5%) = -€6

second reset date (FX rate = 1.10, decrease of 12%)

Notional adjustment $1000 * -12% = -120 dollars

Interest received $1000 * 3% = 30 dollars Interest paid -€1200*(1% -0.5%) = -€6

expiry (FX rate = 1.40, increase of 27.3%)

Notional exchange +$1000 -€1200

Interest received $1000 * 3% = 30 dollars Interest paid -€1200 * (1% -0.5%) = -€6

## Answer by Adam N. (score 4)

https://quant.stackexchange.com/a/61612

First, a couple of notes:

- if the FX rate is 1,2, then the notional exchange -1000 USD / +1200 EUR doesn't make sense, it should be the other way round,

- basis is usually added to, not subtracted from, an interest rate,

- principal adjustment will usually be on the other leg than the one where the spread is (in this case, spread on the EUR leg and adjustment on USD),

- USD LIBOR is being phased out in favour of SOFR and market conventions around RFR (compounded overnight) CIRS aren't yet well established I think - it may be the case that principal reset feature will disappear.

Answering your questions:

- interest is calculated off the adjusted notional,

- final notional exchange is that amount, with which last interest was calculated,

- a notional adjustment basically works as if old notional was being returned and new notional was being paid afresh, to be used for the subsequent interest period,

- a useful rule of thumb is that all principal cash flows should sum to zero.

The cash flows in the example would look like this:

- Initial principal exchange at FX rate 1,2: -1200 USD / +1000 EUR

- First interest exchange: +1200$\cdot$3% USD / -1000$\cdot$(1%+50bp) EUR

- First principal adjustment at FX rate 1,25: +1200-1250 USD

- Second interest exchange: +1250$\cdot$3% USD / -1000$\cdot$(1%+50bp) EUR

- Second principal adjustment at FX rate 1,1: +1250-1100 USD

- Third interest exchange: +1100$\cdot$3% USD / -1000$\cdot$(1%+50bp) EUR

- Final principal exchange: +1100 USD / -1000 EUR

- Each interest exchange and corresponding principal adjustment happen on the same date.