A cross-currency swap in which the bank sponsor/ arranger pays a soft currency (such as Korean Won, Thai Baht, etc) and receives a hard currency (like dollar, euro, etc) . Empirical evidence shows the existence of a correlation between the exposure under a derivative contract and the likelihood of the counterparty defaulting on contractual obligations. However, the correlation might be unfavorable (i.e., positive) between the mark-to-market value of the derivative contract and the probability of default by the the counterparty. In the event of default, the swap will probably have a positive mark-to-market to the bank sponsor. This implies the bank sponsor will not owe money under the swap agreement, but will rather be owed money.

In Asia, prior to 1997, some Asian companies hedged their currency exposures by entering into cross currency swaps with foreign dealers in which they paid local currency (soft currency) and received foreign currency (hard currency like US dollar). The dealers hedged their market risk with Asian banks. However, when the Asian crisis broke out, the mark-to-market on these swaps snowballed. The local currencies depreciated often by half against the US dollar, taking the exposure of the Asian banks to very high levels, relative to the derivative credit exposure associated with the transactions. The increase in credit exposure accompanied by the deterioration in the credit quality of the counterparties resulted in significant losses to many derivative dealers at the time.