Forex swap

In finance, a forex swap (or FX swap) is a simultaneous purchase and sale, or vice versa, of identical amounts of one currency for another with two different value dates (normally spot to forward).

Structure

A forex swap consists of two legs:

* a spot foreign exchange transaction, and
* a forward foreign exchange transaction.

These two legs are executed simultaneously for the same quantity, and therefore offset each other.

It is also common to trade forward-forward, where both transactions are for (different) forward dates.
Uses

By far and away the most common use of FX swaps is for institutions to fund their foreign exchange balances.

Once a foreign exchange transaction settles, the holder is left with a positive (or long) position in one currency, and a negative (or short) position in another. 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. To do this they typically use tom-next swaps, buying (selling) a foreign amount settling tomorrow, and selling (buying) it back settling the day after.