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Derivatives

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  • January 17, 2023
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Buffered Cross-Currency Swap

A cross-currency swap that provides a cushion against a declining exchange rate. In case an investor is facing a depreciating exchange rate, he can enter a cross currency swap in order to minimize the amount of interest payments. A buffered cross currency swap helps this investor bet against the forward rate so that if his bets are proven true, the swap increases the size of leverage. If the bets turn out to be off the mark, then this swap compensates for the effect of a loss. This can be done by buying two strips of digital puts rather than digital calls. The digital put strips are significantly more expensive than the digital call strips. The other elements of this swap are similar to that of a turbo cross-currency swap.


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