A cross currency basis swap which doesn’t involve currency conversion. For example, assume short-term interest rates in Japan are very low, with a steeply upward moving yield curve. And further suppose that short rates in Germany are high, with an inverted yield curve. For an investor holding Japanese assets subject to floating rates, and willing to enhance yield on those assets with an immediate effect without having to bear currency risk, entering into a currency-protected swap would be a viable course of action.

The investor and a bank may agree to exchange floating payments on some notional amount indexed to a specific reference rate (LIBOR) with floating payments on the same notional amount denominated in the same currency at another reference rate (Euribor) minus a spread. The spread reflects differentials in long-term rates between the base currency and the quoted currency. On its own, the bank would pay the floating amounts in return for fixed amounts in one swap, convert these fixed amounts into the quoted currency (Euro) and use the resultant amounts to pay fixed in a fixed-to-floating interest rate swap based on Euribor. Then it converts the floating “quoted currency” (Euro) amounts received to base currency amounts (Yens) in order to pass them on to investors in Japan.

The currency-protected swap is also known as a switch LIBOR swap or a CUPS for short.