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Cross Currency Swap

An agreement on exchange of two currencies and the interest costs relating to these.

A Cross Currency Swap is intended for:

  • corporate entities
  • Czech nationals and foreigners
  • clients who demand security for interest risk resulting from possible negative (for the client) development of specific interest rates

Characteristics of a Cross Currency Swap:

  • a Cross Currency Swap (CCS) is an agreement on exchange of two currencies and the interest costs relating to these
  • party A undertakes to purchase funds in currency 1 from party B for a certain amount of funds in currency 2, on a fixed date
  • at the same time, party A undertakes to sell back the same amount of funds in currency 1 for a certain amount of funds in currency 2 at the same exchange rate and on a later fixed date, no later however than within one year from conclusion of the transaction
  • over the course of the transaction, both parties mutually pay interest on the currencies, which they purchased from each other at the start of the transaction two working days before the start of individual interest periods, fixation occurs of the variable interest rate and its comparison with the fixed rate (for the fixed to float CCS type) or fixing of two variable rates (for the float to float CCS type).
  • settlement occurs at the end of individual interest periods
  • over the duration of the Cross Currency Swap, the counterparties may agree on its cancellation
  • in the event of cancellation of the interest rate swap, settlement occurs of its market value in terms of a one-off payment and cancellation of the whole transaction and all future obligations; interest payments made before the date of cancellation of the swap are not returned
  • on the date of cancellation of the Cross Currency Swap, the participating parties agree on a price for which they are willing to withdraw from the transaction
  • the party, which is in a disadvantageous position (making a loss), pays the other party the agreed amount (market price of the swap) on the spot value date and the swap transaction is cancelled
  • if cancellation of the swap did not occur on the settlement date for interest payments, the unsettled difference from the cost and income interest from the cancelled swap accounted for so far are included in the market price of the swap

Modification of the product

  • Depreciation CCS
    • the nominal value, from which interest is calculated, is decreased over the course of the contract in a manner specified in advance
    • both methods of repayment of the principal are possible:
      • actual repayment of the principal and also depreciation of the basis used for interest
      • reverse exchange of whole principals.
  • Step up CCS
    • the nominal value, from which interest is calculated, is increased over the course of the contract in a manner specified in advance,
    • both methods of repayment of the principal are possible:
      • actual repayment of the principal and also depreciation of the basis used for interest
      • reverse exchange of whole principals

Risk

  • Profit or loss from interest rate transactions is influenced by movement of interest rates.
  • The possible loss is given by the fact that the client finds himself or herself, in terms of an individual interest period, in a disadvantageous position, i.e. the swap interest payment he or she makes is higher than the payment made by the bank.
  • In the case, the client pays the bank an amount equal to the difference between these two payments.
  • If the transaction was concluded for hedging purposes, the client then understands this loss as the cost of hedging. 
  • Hedging protects the client against such a significant change in interest rates, which would cause him or her serious financial problems.
  • The exchanged funds in both currencies and the interest paid from them are influenced by movement of the exchange rates.

Advantages of a Cross Currency Swap agreed at Komerční banka:

  • The transaction is always concluded by telephone with a Client transaction dealer.
  • The client receives confirmation of the concluded transaction containing the agreed parameters of the transaction.
  • at Komerční banka, a team of experienced professionals is at your disposal; they will propose an optimum strategy and are able to respond flexibly to developments on the market.

A Cross Currency Swap allows you to:

  • appreciate available funds on the currency market and profit from positive exchange rate developments

How to get a Cross Currency Swap?

  • contact your relationship manager
  • call the toll-free KB Info line on 800 521 521

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