I am already FRM certified, yet when working in the real world I find problems/situations where when looking back, I realise there things I didn't pay too much attention on. One of these is around cross currency swaps and somewhat generally FX products.

My question is: Do stand-alone cross currency swaps carry FX risk? If I were to just input 1 CCY Swap in an otherwise empty portfolio and run it through a risk system (which uses historical simulation), will I expect to show any FX risk on this position?

There are arguments both ways:

Will have FX risk:

- Cross currency swaps are instruments used for hedging (and speculation) FX. Therefore, simply going by logic, if something is hedging a risk factor, then it necessarily has positive or negative exposure to a risk factor.

- Spot FX is a component in the valuation of cross currency swaps. Therefore, spot FX is a risk factor, therefore we will show FX risk.

- The ending exchange of principal is fixed, therefore we have locked in a FX rate, therefore this would create P&L, therefore there is FX risk on the position.

Will not have FX risk:

- Like an FX swap, cross CCY swaps exchange principal at the beginning and at the end of the contract, which is like having a spot and a FX forward transaction packaged together, therefore the position will not show any FX risk.

The latter point is quite confusing in the context of decomposing a CCY swap into a series of forward contracts. Is this the case, or is it a series of forward contracts + a negating FX spot?

Many thanks all for your input.

Regards,

Nikolaos