Foreign exchange swap
An FX swap combines a near-date exchange of two currency principal amounts with a reverse exchange at a later date, using rates agreed at the outset. The near leg is commonly a spot exchange and the later leg a forward exchange, although dates and terms vary. It can support short-term foreign-currency funding or manage currency exposures. Distinguish it from a longer-term cross-currency swap that can exchange interest streams as well as principal. Settlement, counterparty and liquidity risks remain.
Worked example
A business exchanges $1.1 million for €1 million today and agrees to reverse the exchange at a specified later forward rate. The later dollar amount is determined by that agreed rate, not by whatever spot rate happens to prevail then.
Common mistake
Treating the near and far legs as unrelated trades, or assuming an FX swap necessarily exchanges periodic interest coupons like a cross-currency swap.
Where it appears in your exams
| Qualification | Exam | Relationship | Period |
|---|---|---|---|
| ACCA | AFM | Direct | September 2026–June 2027 |