The name swap suggests an exchange of similar items. Foreign exchange swaps then should imply the exchange of currencies, which is exactly what they are. A foreign currency swap is an agreement to exchange currency between two foreign parties. The agreement consists of swapping principal and interest payments on a loan made in one currency for principal and interest payments of a loan of equal value in another currency. FX swaps have been employed to raise foreign currencies, both for financial institutions and their customers, including exporters and importers.


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At maturity, the same two principal amounts must be exchanged, which creates exchange rate risk as the market may have moved far from 1.

Many swaps use simply notional principal amountswhich means that the principal amounts are used to calculate the interest due and payable each period but is not exchanged. Exchange of Interest Rates There are three variations on the exchange of interest rates: A transaction can be concluded for periods ranging from 3 days to 12 months.

No additional fees are applied to such transactions. To do this they typically foreign currency swap "tom-next" swaps, buying or selling a foreign amount settling tomorrow, foreign currency swap then doing the opposite, selling or buying it back settling the day after.


The interest collected foreign currency swap paid every night is referred to as the cost of carry. As currency traders know roughly how much holding a currency position will make or cost on a daily basis, specific trades are put on foreign currency swap on this; these are referred to as carry trades.

The deal allows for borrowing at the most favorable rate.


They have also been used as a tool foreign currency swap converting currencies of liabilities, particularly by issuers of bonds denominated in foreign currencies.

Mirroring the tenor of the transactions they are meant to fund, most cross-currency basis swaps are long-term, generally ranging between one and 30 years in maturity.

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