Customer accounts are segregated and safeguarded. These companies transact billions monthly. But in two weeks time the firm knows it will require EUR again to pay European suppliers.

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However, in these two weeks the euro could appreciate against the dollar and the business will have to pay more USD to secure the same amount of EUR it traded originally. Instead the company could agree to enter into an FX swap contract. Note for simplicity this example does not take into account the spread your provider would charge or a slight difference in the forward rate due to interest rate differentials. Can SMEs using FX hedging too — or are these hedging tools available exclusively for larger corporations?

Below you can find a finite list of all the companies we covered and give access to currency forwards and swaps for private and corporate clients:.

In virtually all cases an FX swap involves a foreign exchange spot transaction , often referred to as the near leg, and a forward contract going in the opposite direction, often referred to as the far leg. Both trades are executed simultaneously and for identical values.

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Just a quick note on FX swap rates — the only difference in an FX swap will be in the rate for the forward contract as forward rates will differ slightly to spot rates in order to account for the interest rate differential between the two currencies. This is explained in our full guide to forward pricing here including a Forward Rate calculator. If, for example, a company made a spot transaction to purchase AUD with GBP and then booked a separate forward contract after that trade was made to buy GBP again with AUD, they would still be opening themselves to exchange rate risk during the time it takes them to book two separate trades.

Confusingly, although the name might suggest it, a currency swap is not technically an FX swap. Actually, a currency swap is an abbreviated name for a cross currency interest rate swap. A derivative product that is used when there is an exchange of currencies between two parties. The most common purpose of a currency swap transaction is for companies to achieve cheaper funding in alternative countries.

And vice versa, the UK firm is likely to achieve a lower interest rate loan than the US firm. Agreeing both the principal amount that should be exchanged and the interest rate repayments. In an FX swap contract there is no exchange of interest.

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A currency swap aids two firms in removing exchange rate and interest rate risk. In summary, we hope to have cleared up the relationship between an FX swap vs FX Forward and highlighted when an FX swap would be a useful tool. As with all FX products there is a time and place where FX swaps will be the most relevant solution and are best suited as part of a wider hedging strategy.

But just like with an FX forward contract, you can completely hedge your position in the market with an FX swap too.

Readers interested in a greater variety of hedging tools should also refer to our guide on FX options. Thinking of using other transaction types? We'll assume you're ok with this, but you can opt-out if you wish. Out of these cookies, the cookies that are categorized as necessary are stored on your browser as they are essential for the working of basic functionalities of the website.

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This category only includes cookies that ensures basic functionalities and security features of the website. These cookies do not store any personal information. Frequently, entities capture lower costs of funds and greater market liquidity by raising capital in currencies other than their functional currency.

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Because a foreign currency liability is a monetary item, IAS 21 requires the liability to be translated into the entity's functional currency using the exchange rate prevailing at the reporting date, as covered in Chapter 6. The translation gains or losses on the debt are recorded in profit or loss. Thus, absence of an FX hedging strategy may result in significant volatility in profit or loss. This chapter deals with the hedge accounting treatment of foreign currency borrowings swapped back into the issuer's functional currency.