FX Swaps and Cross Currency Swaps

FX Swaps and Cross Currency Swaps

As I said above, there are several types of swaps. Now let’s take a look at the difference between the three main types of swaps.

Forex swap

Fx swap rates are the financial instrument that represents the difference between the paying interest rates of the banks of the two currencies in a pair, which is credited or charged when an open position is carried overnight.

Cross currency swap

A cross currency swap is a foreign exchange transaction that combines the purchase or sale of a currency on a spot basis with the simultaneous sale (or purchase) of the same currency for a specified period on a forward basis. This means the trader performs a combination of two opposite conversion transactions for the same amount, but with different value dates.

This is the official definition. Now let me explain it in simple terms:

A cross swap on Forex trading is a situation that occurs when two companies participating in trades on the foreign market enter into an agreement with each other. Within this agreement, they sell each other the same amount in different currencies based on their current rate immediately after the swap operation itself and not at a higher interest rate compared to the changes of the market. After a predetermined period, which they have set under the forward contract, they sell these amounts back to each other in accordance with their rate under the forward contract.

Currency interest rate swap on Forex

LiteFinance: What is swap in Forex trading? | How to Calculate FX Swaps: Examples | LiteFinance

A currency interest rate on the Forex swap is a simple interest rate swap that is carried out with different currencies.

Despite the fact that this operation is typical for large financial institutions, it also occurs in everyday life.

For example, you have a loan in foreign currency. The only option for you is to take out a new loan to cover the old one. But taking a new loan in foreign currency is a bad option as the stakes are high. But in local currency they are acceptable. At the same time, you happen to have a friend overseas with similar problems. So you take out a loan in your local currency, and he takes out one in his local currency, which is foreign for you. And then you simply exchange these amounts. As a result, you pay interest on his loan, and he does on yours. Everyone wins and you both saved on the interest rate without any risk involved.

To help you understand the difference between the different types of currency swaps, I have made a comparison table:

LiteFinance: What is swap in Forex trading? | How to Calculate FX Swaps: Examples | LiteFinance

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