Why Cross-Currency Swap Unwinds Settle Each Currency Leg Separately
Summary
The document asks why early termination of a cross-currency swap may include a notional exchange unwind value based on spot foreign exchange, in addition to the present value of the swap legs. The response explains that the contract has cash flows and notionals in two currencies, and illustrates how the two legs can have separate present values whose combined value is small when converted into one currency.
Settling only that net value would end the contract while leaving a party with a large exposure to the foreign currency. Instead, the answer describes terminating each leg with a payment in its own currency, including the relevant notional amounts. This method avoids a sudden change in spot FX exposure, although it changes the counterparties’ basis and potentially fixed-rate risks. The example is illustrative and does not set out a universal calculation for a specific contract or establish how every system defines the unwind-value acronym.
Key ideas
- A cross-currency swap has cash flows and notional amounts in two currencies.
- Offsetting the legs only by their net present value in one currency can leave a large foreign-exchange exposure.
- Settling each leg in its own currency avoids that sudden exposure change.
- An unwind can still change basis risk and fixed-rate risk.
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Full text
# Question on unwinding cross-currency swap # Question on unwinding cross-currency swap Hoping someone can help me understand 'Notional Exchange Unwind Value - NEUV' when terminating a cross currency swap prematurely. Where the NEUV is essentially the profit/loss of the notional exchange amount using the latest spot fx rate. As I understand it when unwinding the swap early, the net fee is essentially = FV of the two legs of swap + Notional Exchange Unwind Value Had the xccy swap be allowed to mature naturally, the notional principal swapped at the end is the same as inception, where the notional amt is unaffected by changes in spot FX rate. So why is it then that when you're unwinding the swap early, you are made to pay/receive the NEUV? shouldn't the fee be just the FV? ## Answer by Attack68 (score 2) https://quant.stackexchange.com/a/79116 I don't really care for these terms with acronyms that differ from system to system. Fundamentally, any existing cross-currency swap has two legs. Suppose a EURUSD XCS and the EURUSD exchange rate is 1.07. Suppose you are paying the interest on the EUR leg (and therefore paying a EUR notional at maturity) and you receiving the USD interest (and receiving a USD notional at maturity). This XCS may have net present values of each leg as follows: Eur Leg: -105.0mm EUR Usd Leg: +112.5mm USD Net NPV in USD = 0.15mm USD Net NPV in EUR = 0.14mm EUR You can if you want, just terminate the XCS at the prevailing NPV, i.e. terminate all future cashflows for an exchange of 0.15m USD or 0.14m EUR. But if you do that you will suddenly gain a large spot FX exposure, approximately 105m EUR worth. This is why XCS are not generally terminated with a single net present value offsetting fee. The way to do it which does not result in either party experiencing a large change in FX exposure is to terminate each leg for a cashflow in that currency. I.e. Pay 105mm EUR and Rec 112.5mm USD. Doing the exchange in this way only results in the counterparties changing their XCS basis risks (and fixed rate risks if either leg has fixed rate instead of floating).
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