FX Swaps for Currency Hedging

By 
Badre Bouarich
Last Edited Nov 01, 2023

FX Swaps is a hedging tool that has seen major growth in popularity over the recent decade.

A foreign exchange swap involves two transactions – a purchase and sale of identical amounts of one currency for another – entered into at the same time. 

FX swaps are one of the fastest growing FX instruments in use today, accounting for 49% of daily FX volumes.

This could perhaps be a reflection of the current risk appetite in the market – buyers wanting to completely remove exchange rate risk if they know they will require their base currency again in the future.

📖 FX Swap vs FX Forward

Many businesses opt for a Swap over a Forward for a variety of reasons.

This is how they compare:

FX SwapFX Forward
# of transactionsTwo transactions are agreed and entered into at the same time.Single transaction booked.
MechanismInvolves the purchase of one currency from another (often done at spot), before then purchasing back your original currency at an agreed point in the future (with a forward contract).Purchasing one currency from another at an agreed date in the future for the rate that is available today.
When suitable?When you are 100% certain you will require your base currency again in the future.When you need to hedge a specific currency against another currency
Period available forNormally 2 to 3 years with corporate FX companies, while Moneycorp offers up to 10 years ahead.Normally 2 to 3 years with corporate FX companies, while Moneycorp offers up to 10 years ahead.

 

Deposit on FX swaps

As FX swaps typically involve a forward contract on the far leg of the swap it’s likely a deposit will be required for this leg of the trade. Just like when a client enters into a forward contract on its own the deposit should be around 10% of the value of the swap.

Different Types of Currency Swap 

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. I.e. a US based firm is likely to achieve a lower interest rate loan in the US than a UK firm.

And vice versa, the UK firm is likely to achieve a lower interest rate loan than the US firm. So let’s say both the UK firm was seeking a loan in the US and the US firm was seeking a loan in the UK, then instead of attaining these loans individually they could agree to a currency swap between each other.

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. It’s simply just one party using an FX swap hedging itself from exchange rate risk. A currency swap aids two firms in removing exchange rate and interest rate risk. 

How do FX swap work?

A business headquartered in America also sells its services in the EU and is looking to trade EUR to USD to finance its core American business. But in two weeks time the firm knows it will require EUR again to pay European suppliers. The company could make a trade on the spot to buy USD now, and then change USD back to EUR on the spot in two weeks time (option 2 in our diagram below). 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. The EUR USD swap still allows the company to fund itself in USD for the short term and then receive funds back to EUR in two weeks time without any exchange rate fluctuations.

In this example had the company traded €100,00 EUR @ spot on Day 0 they would have received $110,000 in both scenarios.

However, on day 14, the company would have only received the same amount of €100,00 EUR in return had they agreed to enter into a swap. Had they waited two weeks to convert USD to EUR at spot, then in the example above, $110,000 would have achieved $95,700 EUR. (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).

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Companies offering FX Swaps + Forwards

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:

  1. Currencies Direct Review
  2. World First Money Transfer Review
  3. TorFx Review
  4.  Moneycorp Review
  5. Currency Solutions Review
  6. Global Reach Review
  7. OFX Money Transfer Review
  8. Kantox Money Transfer Review
  9. Key Currency Money Transfer Review
  10. Privalgo Money Transfer Review
  11. Smart Currency Exchange Review
  12. PureFX Money Transfer Review
  13. Currencies.co.uk Money Transfer Review
  14. XE Money Transfer Review (XE.COM)
  15. Voltrex FX (VFX) Money Transfer Review
  16. EasyFX Money Transfer Review
  17. Halo Financial Money Transfer Review
  18. Afex Money Transfer Review
  19. AxiaFX Money Transfer Review
  20. SendFX Review
  21. Transfermate Money Transfer Review
  22. Frontierpay Money Transfer Review
  23. FinGlobal Forex Review

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