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This thesis examines the impact of derivative dealers’ hedging activities on a counterparty’s credit default swap spread caused by exposure stemming from unsecured cross-currency swaps. When a derivative dealer enters into a cross-currency swap with a client, the dealer is exposed to the risk of the client defaulting. The amount of credit risk is dependent on the dealer’s position. If the dealer is in-the-money, the credit risk is higher compared to out-of-the-money. Thus, the dealer must buy additional CDSs when the position moves against the client. Conversely, the dealer will sell CDSs when the derivative moves in favour of the client. The buying or selling of CDSs induced by movements of the underlying FX rate can then possibly impact the client’s CDS spread. This is investigated by setting up a theoretical model in which a dealer is involved in a cross-currency swap. The dealer manages counterparty risk through a dynamic portfolio of the underlying FX rate and the counterparty’s CDS. The aim is to keep the cross-currency swap delta neutral. If the CDS market is sufficiently illiquid, then the theoretical model predicts that (1) when dealers hedge the credit exposure of their netted cross-currency swap portfolio, it affects the CDS spread of the counterparty, and (2) hedging of their exposure should induce a structural break with a negative impact on the correlation between the CDS spread and the corresponding FX rate. This is empirically tested on publicly offered U.S bonds denominated in a foreign currency for non-financial companies where their annual reports state they leverage cross-currency swaps to mitigate foreign exchange risk. This makes it possible to create a proxy for dealers’ exposure. Regressing the change in the dealers’ exposure on the change in the counterparty’s CDS spread, a significant effect is found for 40% of the companies. Furthermore, these companies also experi, This thesis examines the impact of derivative dealers’ hedging activities on a counterparty’s credit default swap spread caused by exposure stemming from unsecured cross-currency swaps. When a derivative dealer enters into a cross-currency swap with a client, the dealer is exposed to the risk of the client defaulting. The amount of credit risk is dependent on the dealer’s position. If the dealer is in-the-money, the credit risk is higher compared to out-of-the-money. Thus, the dealer must buy additional CDSs when the position moves against the client. Conversely, the dealer will sell CDSs when the derivative moves in favour of the client. The buying or selling of CDSs induced by movements of the underlying FX rate can then possibly impact the client’s CDS spread. This is investigated by setting up a theoretical model in which a dealer is involved in a cross-currency swap. The dealer manages counterparty risk through a dynamic portfolio of the underlying FX rate and the counterparty’s CDS. The aim is to keep the cross-currency swap delta neutral. If the CDS market is sufficiently illiquid, then the theoretical model predicts that (1) when dealers hedge the credit exposure of their netted cross-currency swap portfolio, it affects the CDS spread of the counterparty, and (2) hedging of their exposure should induce a structural break with a negative impact on the correlation between the CDS spread and the corresponding FX rate. This is empirically tested on publicly offered U.S bonds denominated in a foreign currency for non-financial companies where their annual reports state they leverage cross-currency swaps to mitigate foreign exchange risk. This makes it possible to create a proxy for dealers’ exposure. Regressing the change in the dealers’ exposure on the change in the counterparty’s CDS spread, a significant effect is found for 40% of the companies. Furthermore, these companies also experi