Cross-border direct loans (CBDL for short) generally refer to a domestic institution (the ‘borrower’) which borrows money from a nonresident. This article refers to CBDL as a banking product: a combination financing arrangement against domestic guarantees. In this kind of financing arrangement，a domestic borrower，as a counter guarantor，applies to a domestic bank (the ‘guarantor bank’) to issue a financial guarantee in favor of an overseas bank ( the ‘lending bank’)，which may accordingly finance the domestic borrower (or its nominated enterprise) based on such a bank guarantee. The guarantor bank is often the main provider of the finance product，contacting the lending bank and sharing the profits with the lending bank. In consideration of the financing costs，the funds are more likely to be in foreign currency such as US dollars instead of renminbi. The borrower sells the foreign currency to the guarantor bank to get an equivalent amount of renminbi for domestic usage. At maturity，the borrower uses renminbi to purchase foreign currency from the guarantor bank to clear the principal and interest.

The key issue in finance products such as these is cost management. The total cost of the product is comprised of three parts: bank guarantee fees，interest on the loan，and the cost of forex settlements and purchases. When the loan is issued，all costs are known initially except the cost of purchasing forex，determined by the exchange rate at maturity. In order to lock in a total cost，the most commonly used tools are forex derivatives such as forwards and swaps. However，such traditional tools can merely fix the cost，while customized cost management addresses the needs of enterprises according to their risk-cost preference. Taking into account such needs，more comprehensive forex derivatives need to be introduced in CBDL，to help borrowers better manage and even lower their financing costs. This article aims to introduce three types of forex derivatives and emphasizes how they can be used in combination with CBDL，to better facilitate enterprises’ cost management.

Cross Currency Swaps

A cross-border direct loan may be medium or long term with interest paid in instalments，such as on a monthly or quarterly basis. That means the borrower needs to purchase forex for interest payments several times. The borrower could purchase forex each time at the spot rate，while he needs to bear the risk from forex  rate fluctuations. Alternatively，the borrower could sign several forex forward contracts，though that might be viewed as unnecessarily troublesome. Instead，a cross-currency swap may be a good alternative.