Options cutting costs for some cross-currency swaps

Dealers found a way to protect some cross-currency swaps from heavy new capital requirements last year, by adding foreign exchange options into the structure – but the powers of the technique are limited. Matt Cameron reports

Dealers are looking for ways to cut the costs that have been piled on to the cross-currency swap market and, last year, they found one – sort of. The new structure replaces the big, credit-risky exchange of principal at the end of the contract with a less capital-intensive foreign exchange option, but while this cuts counterparty exposure, the accompanying trade-offs will stop it becoming a cure-all, dealers accept.

"The reason traditional cross-currency swaps use so much capital is the final