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About Foreign exchange Swap
- Foreign exchange Swap (also known as FX Swap) is based on a combination of a FX spot and FX forward transaction
- The FX swap is a simultaneous sale of one currency for another, with settlement no later than on the spot value date and buyback/resale with settlement on the forward value date
- Both transactions are concluded at the same time
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- FX swap may also be used in a situation when client hedged FX exposure by FX forward, but is unable to settle the payment on the maturity date because incoming receipt is delayed. The spot leg of the FX swap will deliver the currency amount required for the settlement of the original FX forward and forward leg will extend the protection
Important information for you
- Minimum amount for a single transaction is USD 20,000 or foreign currency equivalent
- Potential profit or loss of transactions arises from fluctuation of interest rates of currencies of the FX swap
Example of risk
Please review our model transaction:
Client enters into the FX swap with 1 year settlement of forward leg
- Let´s assume that that 1Y EUR interest rate is 0,5% and 1Y CZK interest rate is also 0,5%
- Client buys EUR 100.000 at spot rate EUR/CZK 27,050
- Client sells EUR 100.000 at forward rate EUR/CZK 27,050
Client is in this operation exposed to the interest rate risk
- Initially the interest earned on EUR 100.000 would be EUR 500 (100.000 x 0,5%) and the interest on CZK 2.705.000 would also be EUR 500 (2.705.000 x 0,5% / 27,050)
- Let´s assume that right after the deal is concluded CZK interest rate rise from 0,5% to 1,5%
- In such case interest on 1Y EUR 100.000 is still EUR 500 but interest on 1Y CZK 2.705.000 is EUR 1.500 (2.705.000 x 1,5% / 27,050)
- In one year client will therefore have EUR 1.000 (CZK 27 050) less then he would otherwise had without entering into FX Swap
- However, if the transaction was executed as hedging, the client views the loss as the cost of hedging. Hedging protects clients from losses from significant interest rate fluctuations causing serious financial problems
Individuals and legal entities, including municipalities – domiciled in the Czech Republic and abroad.
Hedge interest rate risk associated with the development of given interest rates.