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FX Swap

FX Swap


Derivative transaction, which represents quite simple “two-ways” FX- conversion between two currencies. Two ways means, that one day Citi performs BUY-SELL to Deutsche (1st Leg), while on the other day in future (2nd leg) performs vice-versa, so that it will be SELL-BUY operation for the same nominal amount of hedged short currency. Future value may be even starting on next day, or next week, next month, next year etc. depending on the hedging needs of the counterparty. So, for a simplification, it may be described as combination of two reversed FX-spot and FX-Forward deals.

Below attached example shows an FX-swap EUR/USD for nominal of USD 6Mio and for period 13/03-14/03/19. In this case Citi is long in USD funds, while Deutsche has short position and need to cover missing funds. So, Citi sells USD 6Mio and buys from Deutsche EUR 5.314Mio based on spot exchange rate of EUR/USD 1,129085. On the next day, Citi receives back USD 6Mio and pays to Deutsche EUR 5.313Mio based on pre-agreed FWD-rate of 1,129192 so that the result for Deutsche is loss of EUR 503.

? What is the most common reason for such operation?

In this particular case, Citi may be keeping an USD-Nostro A/C for Deutsche to carry-out payment operations in US continent. It might be the situation that Deutsche expected to receive some payments from its trading counterparties in USD on its A/C, but received information that payment will be done unfortunately with one Day delay. As if Deutsche does not have another incoming funds in USD, it would have short-position, but on other hand it may have excess of EUR funds. So that concluding this FX-Swap for a one day, it will be able to fill the gap in Cash-flow and know exactly what will be the costs for that (loss of EUR 503). An alternative to that, would be: (a) to keep the open gap – this would result to increased Penalty Interests or (b) to make simple FX-spot deals on both days – it would expose Deutsche to have open FX risk if EUR/USD rate would materially change on next Day.


Another examples of usage in practice:
So, as it has been described above, FX Swap helps the counterparties to cover the time gaps in Cash-flow so that it helps to cover the short position in one currency while swapping from long position in another currency, while this is afterwards remitted from expect incomings. Therefore, the financial institutions like Banks, Insurance companies, Pension/Investment Funds and other entities conclude very often FX Swaps to hedge the value of their foreign assets (like EUR Bonds, US Shares, EUR Deposits and other investments), as they have huge turnover of various currencies. For instance, when Fund wishes to invest into US shares, it has collected CZK funds from participants, but his USD incoming payment from maturing US Treasury Bills will be in two weeks, they need to swap CZK into USD.

Alternatively, in corporate world, a local subsidiary of Company IKEA has mainly CZK cash income from retail sales, but needs to pay-out dividends to its parent entity in EUR, for which they planned to use an income from sale of Property that was closed and the selling price was concluded in EUR. But, due to a administrative issues on Real estate Cadaster and some Tax-related problems, they were notified by Buyer to receive the purchase price 1 Month later. So that they enter into EUR/CZK Swap, where they sell their CZK cash excess and receive EUR funds for Dividends, and after 1 Month this operation is repeated in opposite direction and they sell EUR from the Purchase price received and gain CZK funds for their daily operation.

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