Forex swap

Forex swap
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Foreign Exchange

Exchange Rates
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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 [hide]
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 or 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:



where:

F = forward
S = spot
rT = interest rate of the term currency
rB = 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:



where rT and rB 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
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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

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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