A flippable cross-currency swap is a cross-currency swap combined with a swaption. This gives its owner the right but not the obligation (on one or more fixing dates in the future) to flip the interest rate payment of the underlying cross-currency swap it is receiving from the other party. That is, if the owner is receiving a:
Fixed rate, on any fixing date it can exercise the right to receive a floating rate instead from the next payment date until the end of the swaption.
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The floating rate is defined in the initial contract. |
Floating rate, on any fixing date it can exercise the right to receive a fixed rate instead from the next payment date until the end of the swaption.
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The fixed rate is defined in the initial contract. |
No premium is paid for this deal. However, if you are the owner of this deal and you are paying a fixed rate, the cost is that this fixed rate will be set higher than the market rate; if you are receiving a fixed rate, it rate will be lower than the market rate.
The advantage for the counterparty is that it can procure a better fixed rate than that currently on offer in the market. However, the risk is that the swaption's owner can always exercise the right to switch the interest rate payments.
Example of a Flippable Cross-Currency Swap
You are an American company paying a floating rate GBP loan. In order to convert your liability into USD you enter into a cross-currency swap, in which you pay a USD fixed rate and receive a GBP floating rate. However, in order to reduce the USD fixed rate you are paying, instead of entering into a regular cross-currency swap you enter a flippable cross-currency swap. The advantage for you is that you procure a reduced USD fixed rate; the risk is that if the defined floating rate rises above the fixed rate you are paying, the owner of this deal will exercise its right to receive the floating rate from you instead of the fixed rate.
Pricing a Flippable Cross-Currency Swap in SDX Interest Rates
Flippable cross-currency swaps cannot be priced directly in SDX Interest Rates. However, you can construct this instrument in the Portfolio page by combining a cross-currency swap with a Bermudan swaption.