What are FX Swaps?

An FX swap is a simultaneous purchase and sale, or vice versa, of one currency for another currency with two different value dates. Two parties agree upon a currency exchange on one day and simultaneously agree to unwind or reverse that transaction on a specified date in the future. More specifically, an FX swap includes two legs. It is a combination of either a spot and a forward position, or two forward positions:

1. In the first leg, a notional amount of currency is either bought or sold against another currency at a specified price on an initial date. The initial date is referred to as the near date.

2. In the second leg, a notional amount of currency is then simultaneously bought or sold against the other currency at a specified price on a specified date in the future. The date in the future is referred to as the far date.
   

Common objectives of trading an FX swap include hedging exposure to currency risk or modifying (“rolling forward”) the value date of an open foreign exchange position.

An FX swap effectively results in little exposure to fluctuations in the prevailing spot rate. This is because, although the first leg opens spot market risk, the second leg immediately offsets it.

‍