Introduction

Foreign exchange Swap refers to the deal which buy one currency(Refer to currency“A”) and sell another currency (Refer to currency“B”)at the spot date, and sell currency “A”and buy currency“B”in the future. The Spot price and Forward price are predetermined at the deal date.

Example

One Company will receive USD 10 million from its buyer, and need to convert to CNY for its daily processing, but this company has to pay USD 10 million as it imports goods from overseas in one year. Now the USD/CNY spot rate is 6.73, and the company make a swap contract with the bank to Sell USD at spot date @6.73 and buy USD@ 6.85 in one year.

Main Risk

As the spot market fluctuates everyday through the contract, the Swap deal may incur loss due to MTM loss.