A forex swap is a financial derivative that allows two parties to exchange currency streams at a predetermined exchange rate. It is commonly used in the foreign exchange (forex) market to hedge against currency risk or to take advantage of arbitrage opportunities.
There are two types of forex swaps: a spot swap and a forward swap. A spot swap involves the exchange of currencies at the current spot rate, with delivery occurring two business days after the trade is executed. A forward swap involves the exchange of currencies at a predetermined exchange rate for delivery at a future date.
Forex swaps can be used in a variety of ways in the forex market. One common use is to hedge against currency risk. For example, a company that imports goods from a foreign country may use a forex swap to lock in a favorable exchange rate for future payments. This can help the company to protect against the risk of currency fluctuations that could negatively impact its profits.
Forex swaps can also be used to take advantage of arbitrage opportunities. For example, if a trader expects the value of a currency to appreciate in the future, they may enter into a forward swap to sell the currency at a lower exchange rate and then buy it back at a higher exchange rate at a later date.
In conclusion, forex swaps are financial derivatives that allow two parties to exchange currency streams at a predetermined exchange rate. They are commonly used in the forex market to hedge against currency risk or to take advantage of arbitrage opportunities.