Forex Swap
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Guide to Forex Swap
Forex swap (or FX swap)
Forex swap (or FX swap) is an over-the-counter short term interest rate derivative instrument. In emerging money markets, forex swaps are usually the first derivative instrument to be traded, ahead of forward rate agreements.
A forex swap consists of two legs:
a spot foreign exchange transaction, and
a forward foreign exchange transaction.
These two legs are executed simultaneously for the same quantity, and therefore offset each other.
FX Swaps
A swap involves two legs, the first usually being a spot transaction and the second a forward transaction. An FX swap involves purchase or sale of one currency in exchange for another, with its immediate resale or repurchase at a later date.
Forex swap is a simultaneous purchase and sale, or vice versa, of identical amounts of one currency for another with two different value dates.
A foreign exchange swap can be used to eliminate potential exchange losses resulting from adverse ... Swap protects customer against exchange rate risk. FX Swap Transaction which involves the actual exchange of two currencies
Do not confused FX swap with a cross currency swap
Currency swaps are often combined with interest rate swaps.
For example, one company would seek to swap a cash flow for their fixed rate debt denominated in US dollars for a floating-rate debt denominated in Euro. This is especially common in Europe where companies "shop" for the cheapest debt regardless of its denomination and then seek to exchange it for the debt in desired currency.
