Is there a situation when a client might want to enter into a cross-currency swap without a back-end notional exchange? What are the risks involved here and how does one hedge against the riskTks

The risk is off course, currency risk, as you will not be able get back the currency at maturity. Hedge accordingly.In that case the currency swap begins to look like a spot foreign exchange transaction where you have interest payments in one currency and interest income in another, but have no plans to alter the structure.e.g. a corporate has some assets in currency A and would like to repatriate them, but leave it's debt structure the same (because it had a good deal on the credit spread in currency A). It would like to service that debt with it's income in currency B, as it is winding down it's operations in country A.Hm.. kind of a strange scenario, but there you go...

Hi there. The swap u r talking about is a coupon only swap. A coupon only swap (COS) has no exchange of principal at maturity. Entities undertake COS to enjoy the interest rate differential they might enjoy by swapping from a higher interest rate currency to a lower interest rate currency. Say from GBP fixed to USD floating. As there is no exchange of princiapl at maturity the efeect of depeciation or appreciation of currencies is only on the coupons of the swap which r small. Infact consider a full currency swap( coupon as well as principal) of say USD 100 mio. The NPV of this swap would be USD 100 mio. Thus the effect of exchange rate movement wud be on the full 100 mio. But the NPV of a COS is v small and thus the effect of spot movement is only to that extent.

I have a related question on Currency Swaps. Say I, Party A entered into an agreement with Part B. We pay CAD fixed interest rate and received USD fixed interest rate for 5 years and we exchange principal upfront( ie. we received CAD principal and paid USD principal)1 Year later the swap value $1million. If I want to unwind the swap, is there any principal exchange? or we just settled the swap by getting $1million. Not sure about the convention of early termination. My guess is we can't do any principal exchange since the $1million captures the future interest rate differentials of the two currencies as well as the principal exchange. Thanks for your help.

Yup SeaHawk you are right. To unwind the swap you just calculated the NPV of the swap and pay/rec this amount.

Thanks Icecloud. Let me put a spin to this question. say we invest in a CAD bond but we want to elminate the currency risk. So we enter into a CAD currency swap and pay CAD interest rate and receive USD interest rate. so we exchange principal in the beginning, we pay USD and receive CAD and use the CAD principal to buy the CAD bond. now the issuer returns the principal earlier so we need to unwind the swap, however, the issuer returns in CAD. Does that mean I need to immediately convert the CAD into USD? Would the MV of the currency swap + the converted USD = to the original USD principal amount? Or there will be noise? I think the noise would probably due to future interest rate differential between CAD and USD. So it is not a perfect hedge if we unwind this early. Am I right?

Could anybody help me to confirm this? Thanks!

PM-ed you matey