Forex Swaps
A forex swap consists of two legs: (i) current spot transaction and (ii) a forward contract. The effect of this is to exchange your currency and then get the currency back in the future. Spot and forward trades are rolled into one. This is generally done for businesses for various reasons.
Swap is a forex trading term and it means a real-time purchase and sale of the same amount of a selected currency for two different dates for the sale and purchase of another selected currency.
Thus, a forex swap is in a way a borrowing mechanism. You basically borrow one currency while lending another for a selected period of time. In other words, swap is interest rates for the currency pairs you sell or buy. Depending on the pair, you may either earn or pay swap interests. By utilizing a forex swap, you can buy/sell a base currency today and sell/buy that currency sometime in the future.
→ NOTE:
Regular forwards are referred to as “outright forwards” because they are more often used.
→ EXAMPLE:
Swapping the US Dollar for a Euro:
Forex trader enters a swap and buys $100,000 with exchange rate of $0.1 per euro. At the same time, another trader agrees to sell in 3 month the same $100,000 dollars to buy Euros at the exchange rate of $0.09. During this trade the trader makes up to 50,000 euro profit because the value of dollar changed.
→ NOTE:
http://www.scribd.com/doc/3927990/forex-swaps
http://stockthoughts.wordpress.com/2008/03/29/what-is-forex-swap-you-should-know-this-now/
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