FX futures price in the interest rate of different currencies, so can you use US treasury bonds (for example /zn) and FX futures (for example SGX USD/CNH FX Future) to create a synthetic bond of a foreign currency?


1 Answer 1


Because exchahnge-traded FX futures have standard monthly dates, it's very unlkely that you can use FX futures to replicate exactly the bond's coupons. However you can use a series of OTC FX forwards or a cross-currency swap to swap some bond's coupons into another currency (fixed or floating). Look up "cross-currency asset swap". For example, you can buy some U.S. treasury debt paying a fixed USD coupon and principal, and enter into a cross-currency swap where you pay the USD amounts that you expect to receive from U.S. treasury and receive some GBP amounts (as an example, or some other foreigh currency). But does this portfolio constitute a GBP-denominated bond?

From some economic standpoint, yes, it already does. But if you're a highly regulated insurance company, for example, and you actually need to own a GBP-denominated bond, not a synthetic one, then you'd need to jump through additional hoops. You'd need some bank to set up a special purpose vehicle (SPV). The SPV will buy the original bond, enter into a cross-currency swap, and issue the GBP bond that you desire. All these labor-intensive services end up being paid for by the bondholder, of course.

And what if the USD bond is not U.S. Treasury, but has credit risk? If the bond defaults, are you still going to be stuck with the cross-currency swap? There is a variation of an asset swap called "perfect" asset swap, which terminates if the bond defaults, but it costs more.

  • $\begingroup$ Can you elaborate on your point about the standard monthly dates and why they're an issue? $\endgroup$
    – Jay C
    Commented Jul 6, 2021 at 19:53
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    $\begingroup$ Suppose for concreteness that you own a U.S. treasury that pays coupons every 6 months for the next 10 years: for example note 912828D56 pays February and August 15th for the next few years. Here are CME EUR futures for example cmegroup.com/markets/fx/g10/euro-fx.calendar.html . There aren't contract settling on these dates. You can't trade a futures contract settling when you receive a coupon. You can use exact dates you want with OTC FX forwards or swaps, or some not exactly matching dates with futures. $\endgroup$ Commented Jul 6, 2021 at 20:34
  • $\begingroup$ I see, but wouldn't it be close enough? it shouldn't make too much of a difference $\endgroup$
    – Jay C
    Commented Jul 6, 2021 at 21:00

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