Why do cross-currency swaps exchange principal while single-currency swaps don't?

Question

AcadiFi · Accepted Answer

In a single-currency IRS, both legs are denominated in the same currency, so exchanging identical notionals adds no economic value — it's omitted for efficiency. In a cross-currency swap (CCS), the legs are in different currencies, and principal exchange is economically meaningful because exchange rates matter.

Suppose Yokohama Marine borrows ¥10B at 1.80% JPY fixed but needs USD to fund a Texas LNG facility. It enters a 5-year CCS with Starboard Global. At inception (spot ¥150/USD):

1. Initial exchange: Yokohama delivers ¥10B, receives $66.67M.
2. Periodic: Yokohama pays USD SOFR + 40bp quarterly on $66.67M; receives JPY 1.80% semi-annual on ¥10B (covering its bond coupon).
3. Final exchange: Yokohama returns $66.67M, receives ¥10B back (to repay its JPY bond).

Without principal exchange, Yokohama would still face FX risk on the ¥10B bond repayment — defeating the hedge purpose.

```mermaid
flowchart LR
  Y[Yokohama] -->|JPY 10B start| S[Starboard]
  S -->|USD 66.67M start| Y
  Y -->|SOFR+40bp| S
  S -->|JPY 1.80%| Y
  Y -->|USD 66.67M end| S
  S -->|JPY 10B end| Y
```

The CCS thus transforms a JPY liability into a synthetic USD liability. Basis spreads on CCS reflect USD funding premiums in offshore markets — the USD/JPY basis turned deeply negative during 2008 and 2020 stress periods, signaling dollar scarcity abroad.

Why do cross-currency swaps exchange principal while single-currency swaps don't?

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