be confused with, currency swap. To do this they typically use "tom-next" swaps, buying (or selling) a foreign amount settling tomorrow, and then doing the opposite, selling (or buying) it back settling the day after. The prices and cost for the customer therefore only reflect the bid-offer spreads on the hedging interest rate contracts. The company knows they will be able to purchase EUR reliably while still being able to use currency for domestic transactions in the interim.
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Similarly, when hedging a borrowing using a swap, the far leg amount will normally be greater, by the interest payable on the swapped borrowing. However, this exposes them to FX risk. In order to collect or pay any overnight interest due on these foreign balances, at the end of every day institutions will close out any foreign balances and re-institute them for the following day. The market-maker can hedge its position by a borrowing and a deposit in the two currencies being swapped. FX swaps are also used to modify the value date of an existing forward foreign exchange contract. Another way of achieving this result is to use the same principal amount of currency in the near leg and the far leg, and to deal with interest in a separate outright forward transaction. Forward foreign exchange transactions occur if both companies have a currency the other needs. Contents, definition of FX swaps, a foreign exchange swap is a composite over the counter (OTC) foreign exchange transaction which involves: (A) An initial exchange of two different currencies on a specified 'near leg' date at a fixed foreign exchange rate which is pre-agreed. For example, if a customer has a temporary surplus bitcoin paypal europe of GBP and a shortfall of EUR for a week, it could enter into the following FX swap contract: Exchange the temporary surplus of GBP into EUR for value spot (the 'near leg.
Foreign exchange swap - ACT Wiki
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