How Cross-Currency Swaps and FX Swaps Carry Market Risk

# XCS and FX swaps: market risks


# XCS and FX swaps: market risks












XCS (cross currency swap) can be:

- Float vs float #1

- Fixed vs fixed #2

- Float vs fixed #3

> #2 can be constructed with 2 fixed vs float irs and 1 xccy basis swap #1

> #3 can be constructed with 1 irs and #1

An FX swap is equivalent to #2 risk wise (I think?)

Is it true that: #1 has fx risk, interest rate risk for each of the two currencies involved, and xccy basis risk?

If so, does that mean that #2 and fx swaps don’t have any interest risk? Only xccy basis and fx risk?

Or if not true then perhaps #1 only has fx risk and xccy basis risk? And then it follows that #2 and fx swaps do have, on top of fx and xccy basis risk, interest risk for each currency?

## Answer by Attack68 (score 3)

https://quant.stackexchange.com/a/75554

Broadly you are on the right track. I have used Python's `rateslib` to make these calculations.

Setup the curves and the risk engine

```
from rateslib import *
usdusd = Curve({dt(2023, 1, 1): 1.0, dt(2024, 1, 1): 0.95}, id="usd")
eureur = Curve({dt(2023, 1, 1): 1.0, dt(2024, 1, 1): 0.975}, id="eur")
eurusd = Curve({dt(2023, 1, 1): 1.0, dt(2024, 1, 1): 0.975}, id="eurusd")
instruments = [
    IRS(dt(2023, 1, 1), "1Y", "A", currency="usd", curves="usd"),
    IRS(dt(2023, 1, 1), "1Y", "A", currency="eur", curves="eur"),
    XCS(dt(2023, 1, 1), "1Y", "Q", currency="eur", leg2_currency="usd", curves=["eur", "eurusd", "usd", "usd"])
]
fxr = FXRates({"eurusd": 1.10}, settlement=dt(2023, 1, 3))
fxf = FXForwards(
    fx_rates=fxr,
    fx_curves={
        "usdusd": usdusd,
        "eureur": eureur,
        "eurusd": eurusd,
    }
)
solver = Solver(
    curves=[usdusd, eureur, eurusd],
    instruments=instruments,
    s = [5.0, 2.5, -10],
    instrument_labels=["USD 1Y", "EUR 1Y", "XCS 1Y"],
    fx=fxf,
    id="XCCY"
)
```

Now I build each of your instruments and query the delta. First a mark-to-market cross currency swap:

```
xcs = XCS(
    dt(2023, 1, 1), "1Y", "Q", 
    notional=100e6, currency="eur", 
    leg2_currency="usd", 
    fx_fixings=1.10, 
    curves=["eur", "eurusd", "usd", "usd"]
)
xcs.delta(solver=solver, base="eur").style.format("{:.0f}")
```

Second a fixed-fixed cross currency swap.

```
ffxcs = FixedFixedXCS(
    dt(2023, 1, 1), "1Y", "A", 
    notional=100e6, currency="eur", fixed_rate=2.41,
    leg2_currency="usd", leg2_fixed_rate=5.01,
    fx_fixings=1.10, 
    curves=["eur", "eurusd", "usd", "usd"]
)
ffxcs.delta(solver=solver, base="eur").style.format("{:.0f}")
```

And finally an FXswap (I have had to iterate the fixed rate input to get a mid-market FXSwap)

```
fxs = FXSwap(
    dt(2023, 1, 1), "1y", "Z",
    notional=100e6, currency="eur", 
    leg2_currency="usd", leg2_fixed_rate=2.54,
    fx_fixing=1.10,
    curves=["eur", "eurusd", "usd", "usd"],
)
fxs.delta(solver=solver, base="eur").style.format("{:.0f}")
```

The FXSwap has 216 EUR per pip risk to the EURUSD FX rate because each leg of the FXswap has an NPV in each local currency when executed at mid market. (This is an FX swap without splits, i.e. where the base notional is the same at the effective and termination dates, which creates the FX risk. WIth interest rates not around zero, FX swaps with split notionals are more common and these dont create the spot FX risk)