<P> An approach to work around this is to select one currency as the funding currency (e.g. USD), and select one curve in this currency as the discount curve (e.g. USD interest rate swap curve against 3M LIBOR). Cashflows in the funding currency are discounted on this curve . Cashflows in any other currency are first swapped into the funding currency via a cross currency swap and then discounted . </P> <P> XCSs expose users to many different types of financial risk . </P> <P> Predominantly they expose the user to market risks . The value of a XCS will change as market interest rates, FX rates, and XCS rates rise and fall . In market terminology this is often referred to as delta and basis risks . Other specific types of market risk that interest rate swaps have exposure to are single currency basis risks (where various IBOR tenor indexes can deviate from one another) and reset risks (where the publication of specific tenor IBOR indexes are subject to daily fluctuation). XCSs also exhibit gamma risk whereby their delta risk, basis risks or FX exposures, increase or decrease as market interest rates fluctuate . </P> <P> Uncollateralised XCSs (that are those executed bilaterally without a credit support annex (CSA) in place) expose the trading counterparties to funding risks and credit risks . Funding risks because the value of the swap might deviate to become so negative that it is unaffordable and cannot be funded . Credit risks because the respective counterparty, for whom the value of the swap is positive, will be concerned about the opposing counterparty defaulting on its obligations . </P>

Cross currency swap vs cross currency interest rate swap