Forex swap

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Foreign Exchange

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Exchange Rates Currency band Exchange rate Exchange rate regime Fixed exchange rate Floating exchange rate Linked exchange rate

Markets Foreign exchange market Futures exchange

Products Currency Currency future Non-deliverable forward Forex swap Currency swap Foreign exchange option

See also Bureau de change

In finance, a 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.

Contents 1 Structure 2 Uses 2.1 Hedging 2.2 Speculation 3 Related instruments 4 See also

[edit] Structure

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.

[edit] Uses

Forex swaps are used for hedging currency positions and for speculation.

[edit] Hedging

Investors use forex swaps to hedge their existing forex exposures by swapping temporary surplus funds in one currency into another currency for better use of liquidity. Doing so protects against adverse movements in the forex rate, but favourable moves are renounced.

[edit] Speculation

Investors use forex swaps to speculate on changes in the interest rate differentials between two currencies.

The relationship between spot and forward is as follows:

<math> F = S \left( \frac{1+r_T T}{1+r_B T}\right) </math>

where:

• F = forward
• S = spot
• r_T = interest rate of the term currency
• r_B = interest rate of the base currency
• T = tenor (calculated according to the appropriate day count convention)

The forward points or swap points are quoted as the difference between forward and spot, F - S, and is expressed as the following:

<math> F - S = S \left( \frac{1+r_T T}{1+r_B T} -1 \right) \approx S \left( r_T - r_B \right) T </math>

where r_T and r_B are small. Thus, the absolute value of the swap points increases when the interest rate differential gets larger, and vice versa.

[edit] Related instruments

A forex swap should not be confused with a currency swap, which is a much rarer, long term transaction, governed by a slightly different set of rules.

[edit] See also

• Currency swap
• Overnight index swap
• Foreign exchange market
• Interest rate swap

v • d • e Derivatives market
Derivative (finance)
Options	Terms: Strike price · Expiration · Open interest · Pin risk Vanilla options: Option styles · Call · Put · Warrants · Fixed income · Employee stock option · FX Exotic options: Asian · Lookback · Barrier · Binary · Swaption · Mountain range Options strategies: Covered call · Naked put · Collar · Straddle · Strangle · Butterfly Options spreads: Bull spread · Bear spread · Calendar spread · Vertical spread · Debit spread · Credit spread Valuation of options: Moneyness · Option time value · Put-call parity · Black-Scholes · Black · Binomial · Simulation
Swaps	Interest rate swap · Total return swap · Equity swap · Credit default swap · Forex swap · Currency swap · Constant maturity swap · Basis swap · Volatility swap · Variance swap
Other derivatives	Credit derivative · Equity derivative · Interest rate derivative · Inflation derivatives

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