Why Cross-Currency Basis Swaps Are Year-End Focus: QuickTake Q&A

A surge in U.S. dollar borrowing costs against the euro and the yen in the closing days of 2017 has cast the spotlight on cross-currency basis swaps. The premium paid to borrow the greenback in exchange for the euro for three months surged to a six-year high, with traders offering various reasons: Year-end demand to tidy up accounts for regulatory scrutiny, or preparations for changes in the U.S. tax code that could drive the repatriation of dollars by U.S. companies.

They are contracts where two sides agree to exchange interest payments in two different currencies. During the life of the contract, floating interest-rate payments are swapped, typically on a quarterly basis. What makes them unique in the world of swaps is that the parties agree to exchange notional principals, or the face amount used to calculate the payments.