DEFINITION of 'Circus Swap'

A combination of an interest rate swap and a currency swap in which a fixed-rate loan in one currency is swapped for a floating-rate loan in another currency. A circus swap therefore converts not just the basis of the interest rate liability, but also the currency of this liability. The floating rate in a circus swap is generally indexed to U.S. dollar LIBOR. The term is derived from the acronym CIRCUS, which stands for Combined Interest Rate and Currency Swap. Also known as a “cross-currency swap” or “currency coupon swap".

BREAKING DOWN 'Circus Swap'

Companies and institutions use circus swaps to hedge currency and interest rate risk, and to match cash flows from assets and liabilities. They are ideal for hedging loan transactions since the swap terms can be tailored to perfectly match the underlying loan parameters.

As an example, consider Euromax, a European company that has a US$100 million loan with a floating interest rate (LIBOR + 2%) on its books. The company is concerned that U.S. interest rates may begin to rise, which would lead to a stronger U.S. dollar against the euro, making it more expensive to make future interest and principal repayments. Euromax would therefore like to swap into a fixed-rate loan in Japanese yen, because interest rates in Japan are low and it believes the yen may depreciate against the euro. It therefore enters into a circus swap with a counterparty that converts its U.S. dollar floating-rate debt into a fixed-rate loan in Japanese yen. If the company’s views on future interest rates and currencies are correct, it can save a few million dollars on servicing its debt obligations over the loan's term.  
 

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