Not to be confused with Currency swap. A foreign exchange swap has two legs – a spot transaction and a forward transaction – that forex ad swaps executed simultaneously for the same quantity, and therefore offset each other. Forward foreign exchange transactions occur if both companies have a currency the other needs. It prevents negative foreign exchange risk for either party.
The most common use of foreign exchange swaps is for institutions to fund their foreign exchange balances. In order to collect or pay any overnight interest due on these foreign balances, at the end of every day institutions will close out any foreign balances and re-institute them for the following day. The interest collected or paid every night is referred to as the cost of carry. Companies may also use them to avoid foreign exchange risk. A British Company may be long EUR from sales in Europe but operate primarily in Britain using GBP. However, they know that they need to pay their manufacturers in Europe in 1 month.
They could spot sell their EUR and buy GBP to cover their expenses in Britain, and then in one month spot buy EUR and sell GBP to pay their business partners in Europe. However, this exposes them to FX risk. Thus, the value of the swap points is roughly proportional to the interest rate differential. A foreign exchange swap should not be confused with a currency swap, which is a rarer long-term transaction governed by different rules. Reuters Glossary, “FX Swap” Archived 2009-01-11 at the Wayback Machine.
This page was last edited on 10 April 2018, at 10:58. The following table shows the average swap rates on currency pairs. Rates shown are averaged across all brokers. Has Anyone Made Money On Zulutrade? Toro’s Copy Trading: Does It Work and Should You Be Using It? Our network of expert financial advisors field questions from our community.
Sophisticated content for financial advisors around investment strategies, industry trends, and advisor education. A celebration of the 100 most influential advisors and their contributions to critical conversations on finance. The latest markets news, real time quotes, financials and more. What is a ‘Foreign Currency Swap’ A foreign currency swap is an agreement to exchange currency between two foreign parties. BREAKING DOWN ‘Foreign Currency Swap’ The purpose of engaging in a currency swap is usually to procure loans in foreign currency at more favorable interest rates than if borrowing directly in a foreign market. The World Bank first introduced currency swaps in 1981 in an effort to obtain German marks and Swiss francs. This type of swap can be done on loans with maturities as long as 10 years.