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FX Forward vs FX Swap : What is the Difference?


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  • FX Forward vs FX Swap : What is the Difference?

    Hello Everyone,
    What are the differences between FX Forward and FX Swap transactions in the Forex market?

  • #2
    Market participants can manage forex risk with both FX forwards and FX swaps, but their structures and purposes differ.

    The FX Forward contract involves exchanging one currency for another at a predetermined rate with a future settlement. Today businesses and investors can hedge against currency risks by locking in an exchange rate for a future transaction. Depending on the agreement between the parties, the settlement date can be as soon as two days from now or as far as several years in the future.

    Contrarily, the FX Swap involves the purchase and sale of two currencies at different settlement dates. It entails an agreement between two parties to exchange currencies at an agreed-upon rate. The first exchange occurs immediately, while the second is scheduled for a future date. Essentially, it allows for borrowing one currency while lending another simultaneously. Its purpose is to manage cash flows and reduce exposure to currency risks.

    The key difference between FX Forward and FX Swap is their settlement structure since both involve exchanging one currency for another. An FX forward contract involves exchanging currencies at a future date, while an FX Swap contract involves buying and selling currencies simultaneously with two different settlement dates.