Immersed in the very essence of calculations in the global economy and the stock exchange.

Today I decided to write an article about which some traders have never even heard of, despite the fact that they perform such operations regularly. Let’s talk about the swap and its varieties. In this article, you can find answers to such questions: What is a forex swap? What are swap operations in the foreign exchange market? Why do you need to know currency pair swaps? Let us examine a number of examples, such as interest rate swap example, interest rate swap rate and currency-interest rate swap. And of course, we’ll find out why a trader in the Forex market needs all this.

What is a currency swap?

It does not make sense to start a conversation about swaps unless you understand in detail the very definition of a swap and the essence of the operation itself. So, a currency swap is a currency transaction combining the purchase or sale of currency on a spot basis with the simultaneous sale (or purchase) of the same currency for a certain period of time on a forward basis, that is, a combination of two opposite conversion transactions for the same amount is carried out, but with different value dates.

You must admit that this definition is not clear. I’ll try to translate from financial to human. The two companies participating in trading on the foreign exchange market enter into an agreement between themselves, according to which they sell to each other the same amount in different currencies based on their current exchange rate immediately after the conclusion of the swap operation itself. After a predetermined period that they have established under the forward contract, they sell each other these amounts back in accordance with their exchange rate for the forward contract.

If you delve into this operation, then a logical question immediately arises: “What’s the point?”, Or rather: “Where is the profit?”. And the answer to this question lies precisely in its purpose. This operation is not intended for profit. This operation is performed in order to achieve a situation in which the result from the initial sale or purchase of a certain amount of currency will be approximately equal to the result from the subsequent reverse exchange. The main need for such an operation is a safe and almost complete hedge of your cash flows. These operations, as a rule, are carried out only through the mediation of large financial organizations, such as banks or foreign exchange dealers, who conduct them on the world currency market, thereby creating the usual fluctuations in exchange rates. Of course.

Now you know who really sometimes manipulates prices in the foreign exchange market.

Currency swap in the modern market can be divided into three main types:

  1. Simple currency swap;
  2. Interest rate swap;
  3. Currency interest rate swap.

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