A currency swap is the ideal instrument to manage the maturity of cash flows in foreign currencies. It is a combination of two foreign exchange transactions. Usually, you enter a spot and a forward transaction. Thus, the exchange into another currency and the re-exchange at a later date is stipulated in an FX swap.
What are typical use cases of a foreign exchange swap?
- Changing the due date
A swap transaction can be used to change the maturity date of an existing foreign exchange transaction. I.e. the existing business is extended or brought forward. For example, a currency swap can be used to change the maturity of a hedge.
- Cash and risk management
FX swaps enable better management of cash flows from operations. Cash outflows in foreign currencies can, for example, be offset with future cash inflows in the same currency by means of a swap. Due to the swap, liquidity is available in the desired currency. At the same time, the risk of exchange rate changes between the two dates is hedged.
Why does the interest rate differential have to be taken into account in a currency swap?
Since at least one forward transaction is involved in a swap, the price of the swap depends, among other things, on the interest rate differential of the currency pair. Depending on the interest rate level of the two currencies involved, you receive or pay interest for the term of the transaction. For example, if you buy EUR on the future date, you benefit from the interest rate difference. This is because interest rates are lower in Switzerland than in the EU.
How can a swap be concluded with AMNIS?
With AMNIS WebApp you have two options: If you only want to change the due date of an existing transaction, the “Date” button is available in the pending transactions area. To initiate a swap with two freely selectable dates, the currency exchange type “Swap” can be selected.