Currency and FX Swaps · Swaps Trading Guide

Currency hedges can reduce exchange rate exposure while creating settlement and refinancing demands. Plan for both currencies before each payment date.

Distinguish three risks

Market risk concerns changing exchange rates. Replacement cost risk concerns replacing a contract after default. Principal settlement risk arises when one currency is paid but the other is not received. A contract that largely offsets currency market exposure can still have a large gross principal settlement exposure.

Use linked settlement where available

Payment versus payment arrangements link the final transfer of one currency to the transfer of the other. Eligibility, currency coverage and operational deadlines matter. Netting can reduce payment amounts where enforceable and operationally supported, but an internal spreadsheet net does not create a legally effective settlement arrangement.

Prepare for a failed rollover

Suppose a firm expects to receive dollars from a new swap to repay an expiring swap. If the new trade is unavailable, the old payment remains due. Maintain a dated funding plan and test the effect of delayed receipts, holidays, dealer withdrawal and larger collateral calls.

Measure the cash gap

A firm owes USD 5,000,000 at 10 a.m. and expects an equal receipt at 3 p.m. Its daily net may be zero, but it still needs intraday funding. Confirm cutoff times, settlement instructions and contingency contacts. Counting gross flows by currency and time makes this exposure visible before a deadline is missed.

Try it yourself

USD 3,000,000 must be paid before an expected USD 2,400,000 receipt can be used. There is USD 1,000,000 available now. How much additional immediate liquidity is needed?

Show the worked answer

USD 2,000,000 is needed at the payment deadline. The later receipt reduces the subsequent net funding need, but it does not solve the earlier timing gap.

Further reading

Educational material, not a recommendation to transact. Numerical examples are hypothetical and simplify contract terms. Access, documentation, collateral and regulatory requirements depend on the product, jurisdiction and counterparties.

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