A credit default swap (CDS) in which the swap premium payments, and/or the cashflows in the case of default, are not in the same currency, i.e., in a different currency to that of the reference asset. For example, a CDS may have its reference as a dollar-denominated bond for which the premium of the swap is payable in euros and in case of default the payment equals the recovery rate on the dollar bond payable in euros. Simply put, this CDS is written on a dollar bond, while its premium is payable in euros. In general, quanto swaps are used to hedge holdings in bonds or bank loans that are denominated in a foreign currency (other than the investor’s home currency).
February 19, 2023