Is currency trading profitable for the common man?

Foreign exchange swap - explanation and benefits

A swap is generally a change, exchange. Accordingly, a foreign exchange swap is an exchange of foreign currency.

Since foreign currencies are often traded via FOREX, currency swaps are also called FX swaps. The spot transaction is sometimes also referred to as the FX spot and the futures transaction as the FX forward.

The steps of a forex swap

As a rule, a foreign exchange swap consists of a combination of a foreign exchange spot transaction and a forward exchange transaction, with these two transactions opposing each other.

It is common for the two swap partners to exchange the same amount in the selected base currency for both transactions.

An example: Partner A wants to sell € 5 million against US $ at the current spot rate and buy the same amount in 6 months. His swap partner B is currently buying € 5 million from him for US $ at the current spot rate.

This first part of the swap, the foreign exchange spot transaction, must generally be based on the current spot rate, unless the swap partners expressly agree on a different one.

The mean spot rate is usually agreed here as the base rate. 6 months later - after the agreed period has expired - the forward transaction is fulfilled and partner A buys € 5 million from partner B for US $ at the previously determined base rate.

At the end of the foreign exchange swap, both partners thus have the amount they had at the beginning of the foreign exchange swap.

These are the main features of all currency swaps, even if in practice any interest or agreed discounts must be taken into account. Brokers may also incur certain costs.

Further basic knowledge of currency swaps

When referring to currency swaps, first the spot and then the forward transaction is mentioned, both in German and in English.

So if the term “buy-sell” is used, someone buys in the cash business and sells in the forward business. If it is called "sell-buy", someone sells in the cash business and buys in the forward business.

If only buying or selling is mentioned, this refers to the forward transaction, i.e. the last transaction.

In foreign exchange swaps, two currencies are exchanged, but the individual partners only ever operate with the same currency.

When forex swaps can be interesting

Foreign exchange swaps are often used to "extend" an existing forward transaction that, contrary to the agreement, cannot be kept by a partner for certain reasons.

The foreign exchange swap gives both partners the security of an agreed base rate which, together with the newly set date and the same amount, gives them planning security and possibly liquidity.

A foreign exchange swap could, for example, be interesting at the end of the existing forward transaction due to delivery bottlenecks or production delays.

In addition, a foreign exchange swap can also be useful for liquidity purposes in a foreign currency if the required amount is available but not in the currency currently required.

For whatever reason you decide on a foreign exchange swap, you should first find out about the conditions and any costs that may arise.

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