Swaps

Posted by Scriptaty | 8:39 PM

FX swaps are transactions involving the immediate exchange of two currencies (and their associated interest rates) at a spot rate and, later, a future offsetting exchange at a forward rate.

(Forward transactions, by comparison, do not involve the immediate exchange of currencies at the spot rate.)

For example, a swap might consist of one party exchanging $1 million for Japanese yen at the current USD/JPY rate and reversing (at a specified future date) the transaction at an agreed-upon exchange rate.

Among other things, a swap allows a trader to extend an existing forward position to an even later date.

“The forward time frame is not locked down — it can be applied at any date in the future,” says Kurt Hoeksema, chief dealer at Global Forex Trading. “And you can ask for the future date at the time the trade is entered into. That flexibility is what is so beneficial to a long term trader.”

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