Currency and FX Swaps · Swaps Trading Guide

FX swaps and cross currency swaps both connect currencies, but their cash flow schedules serve different funding and hedging needs.

Two exchanges in an FX swap

A conventional FX swap exchanges two currencies on a near date and reverses the exchange on a far date at an agreed rate. An institution can use it to obtain one currency temporarily while providing another. The difference between the two exchange rates is part of the economics, not a prediction that the spot market must reach the far rate.

Periodic payments in a cross currency swap

A cross currency swap typically exchanges interest streams in different currencies and may exchange principal at the start and end. Some structures reset notionals using exchange rates. Fixed and floating combinations are possible. Read the actual contract rather than assuming every currency swap has the same principal mechanics.

Follow the units

Suppose the near exchange is EUR 1,000,000 for USD 1,100,000. A far rate of USD 1.105 per EUR implies USD 1,105,000 for the same EUR amount on reversal. The USD 5,000 difference alone is not a complete investment profit. Both currencies have funding costs and payment obligations.

Choose the schedule that matches the need

A temporary cash shortage and a multiyear foreign currency liability are different problems. Repeated short FX swaps introduce rollover risk. A longer cross currency agreement can reduce frequent refinancing but creates valuation, collateral and counterparty exposures. Match the transaction to dated liabilities instead of choosing solely by the quoted rate.

Try it yourself

A far exchange reverses EUR 2,000,000 at USD 1.08 per EUR. How many dollars are exchanged?

Show the worked answer

USD 2,160,000. The direction depends on which party returns the euros. This gross principal amount is not the profit on the swap.

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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