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Exchange currencies now and reverse it later
Two exchanges bundled into a single trade: currencies swap one way today and back the other way on an agreed future date, both rates fixed at inception. Because the second leg undoes the first, the trade takes almost no view on where the exchange rate goes — what it does is move cash from one currency to another for a defined period, which makes it a funding and liquidity tool rather than a directional one. It is the busiest instrument in the FX market.
Open in the app · FX · intermediate
An FX swap packages two exchanges into one contract: currencies are swapped at today’s rate (the near leg) and swapped back at an agreed forward rate on a future date (the far leg). Both rates are agreed at the outset, and both legs are with the same counterparty under one confirmation.
The near and far rates differ only by the forward points. A firm holding dollars that needs euros for three months sells dollars for euros today and contracts to reverse the trade in three months — the economic effect is borrowing one currency while lending the other, and the points are the interest differential between them.
Because both legs move together, the swap is priced as a single number — the points. The absolute spot level used is largely a matter of convention, provided both legs are struck off the same base.
FX swaps manage short-term liquidity across currencies, roll a maturing forward hedge out to a later date, and move cash where it is needed without taking an outright currency position. By turnover they are the largest single instrument in the FX market.
In the BIS triennial survey FX swaps account for roughly half of all FX turnover — more than spot and outright forwards put together.
Near leg, far leg, forward points (which are the swap’s price), and the two value dates. Very short tenors are common, including overnight and “tom-next” trades that shift settlement by a single day.
With spot settling two business days out, a tom-next swap moves a position from tomorrow’s date to the spot date — the standard way to keep rolling a position that would otherwise have to be delivered.
Because both legs are fixed at inception, outright FX risk largely cancels out — but the position is still exposed to moves in interest rate differentials, and the far leg carries counterparty and settlement risk until it completes.
Settlement risk is real when principal moves in two currencies in different time zones. CLS settles a large share of FX turnover on a payment-versus-payment basis so that neither leg pays unless both do.
The 54 points are the interest gap, not a forecast. The manager lent dollars at the higher rate and borrowed euros at the lower one, and $270,000 on $54,000,000 is 0.5% over three months — the 2% annual differential.
Banks use FX swaps continuously to fund balance sheets that borrow in one currency and lend in another, and corporate treasuries and money-market funds use them to push cash to whichever currency needs it that week. Fund managers use them to roll currency hedges: when a forward hedging an overseas portfolio matures, a single FX swap closes the old leg and opens the next one.
The app adds a twelve-question bank for FX Swap, drawn differently every sitting, and a review queue for whatever you miss.
A subscription adds 3 further sections on FX Swap — Funding, wearing an FX label, Rolling overnight, When the funding market tightens — and 12 more questions to its bank.
Educational content only. Nothing here is financial advice, an offer to trade, or a recommendation to buy or sell any instrument.