Forex Swaps

In the spot and outright forward markets, one currency is traded outright for another, but in the Forex swap market, one currency is swapped for another for a period of time, and then swapped back, creating an exchange and re-exchange.

An Forex swap has two separate legs settling on two different value dates, even though it is arranged as a single transaction and is recorded in the turnover statistics as a single transaction.

The two counter parties agree to exchange two currencies at a particular rate on one date (the “near date”) and to reverse payments, almost always at a different rate, on a specified subsequent date (the “far date”).
Effectively, it is a spot transaction and an outright forward transaction going in opposite directions, or else two outright forwards with different settlement dates,and going in opposite directions.
If both dates are less than one month from the deal date, it is a “short-dated swap”; if one or both dates are one month or more from the deal date, it is a “forward swap.”

The two legs of an Forex swap can, in principle, be attached to any pair of value dates. In practice, a limited number of standard maturities account for most transactions. The first leg usually occurs on the spot value date, and for about two-thirds of all Forex swaps the
second leg occurs within a week.
However, there are Forex swaps with longer maturities. Among dealers, most of these are arranged for even or straight dates e.g., one week, one month, three months but odd or broken dates are also traded for customers.

The Forex swap is a standard instrument that has long been traded in the over-the-counter market. Note that it provides for one exchange and one reexchange only, and is not a stream of payments.

The Forex swap thus differs from the interest rate swap, which provides for an exchange of a stream of interest payments in the same currency but with no exchange of principal; it also differs from the currency swap (described later), in which counterparties exchange and re-exchange principal and streams of fixed or floating interest payments in two different currencies.