What is a foreign exchange swap (Foreign Exchange Swap)?

Foreign exchange swaps, also known as exchange rate swaps, refer to two currency exchanges in opposite directions agreed by the parties to the transaction at the agreed exchange rate on different interest calculation dates. For example, at the same time that the currency A on hand is exchanged for currency B at a certain exchange rate, it is agreed to exchange currency B for the same amount of currency A on a designated date in the future at another exchange rate. Such a swap transaction locks currency B for currency A. The cost of currency avoids the risk of paying more currency B to obtain the same amount of currency A when currency A appreciates against currency B.

Exchange rate quotation and calculation of foreign exchange swaps

Each foreign exchange swap transaction involves two exchange rates, the first exchange currency is called the near-end exchange rate, and the second exchange currency is used the remote exchange rate.

The exchange rate quotation method in general swap transactions is the market maker model, that is, the quotation is based on the “market maker buying price/market maker selling price”. The calculation method of the near-end swap rate and the far-end swap rate is as follows:

Example:

When a 1-month/3-month USD/CNY forward-to-forward swap transaction is completed, the spot exchange rate quoted by the market maker is 6.6/6.7, the near-end swap point is 100/150bp, and the far-end The swap point is 200/250bp. then

The initiator buys at the near end and sells at the far end, the near-end swap rate is 6.7+150bp=6.7150, and the far-end swap rate is 6.7+200bp=6.7200.

The initiator sells at the near end and buys at the far end, the near-end swap rate is 6.6+100bp=6.6100, and the far-end swap rate is 6.6+250bp=6.6250.

How to trade foreign exchange swaps?

The functional characteristics of foreign exchange swaps: the customer entrusts the bank to buy currency A, sell currency B, confirm the reverse operation on another working day in the future, sell currency A of the same amount, and buy currency B. After the client has made a forward foreign exchange transaction, it needs to be delivered in advance for some reason, or cannot be delivered on time due to insufficient funds or other reasons. When a renewal is required, the delivery time of the original transaction can be adjusted by making a foreign exchange swap transaction.

A foreign exchange swap transaction can be regarded as composed of two foreign exchange transactions with the same transaction amount, different value dates, and opposite transaction directions. Therefore, a foreign exchange swap transaction has two value dates and two The agreed exchange rate level of the foreign exchange swap. In swap foreign exchange transactions, the customer and the bank convert one currency to another currency at an agreed exchange rate level, settle the funds on the first value date, and exchange the above two at another agreed exchange rate. The currency is converted in the opposite direction, and the funds are delivered on the second value date.

The most common swap transaction is a combination of a spot transaction and a forward transaction, which is equivalent to selling currency A and buying currency B while buying forward currency A and selling in the opposite direction. Forward foreign exchange transactions of currency B.