The popularity of Forex Swaps reflects the fact that banks and others in the dealer, or interbank, market often find it useful to shift temporarily into or out of one currency in exchange for a second currency without incurring the exchange rate risk of holding an open position or exposure in the currency that is temporarily held.
This avoids a change in currency exposure, and differs from the spot or outright forward, where the purpose is to change a currency exposure.
The use of Forex Swaps is similar to actual borrowing and lending of currencies on a collateralize basis.
Forex Swaps provide a way of using the foreign exchange markets as a funding instrument and an alternative to borrowing and lending in the Eurodollar and other offshore markets.
They are widely used by traders and other market participants for managing liquidity and shifting delivery dates, for hedging, speculation, taking positions on interest rates, and other purposes.
Tuesday, 21 April 2009
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