the swap is basically purchasing foreign currency in the spot market and selling at forward or purchasing

at forward and selling also at forward

swap in purchasing in spot rate and selling at forward and swap out is the opposit of it

Forex swap

From Wikipedia, the free encyclopedia Foreign exchange

Exchange rates

Currency band

Exchange rate

Exchange rate regime

Fixed exchange rate

Floating exchange rate

Linked exchange rate

Markets

Foreign exchange market

Futures exchange

Retail forex

Products

Currency

Currency future
Non-deliverable forward

Forex swap

Currency swap

Foreign exchange option

Historical agreements

Bretton Woods Conference

Smithsonian Agreement

Plaza Accord

Louvre Accord

See also

Bureau de change / currency exchange (office)

In finance, a forex swap (or FX swap) is a simultaneous purchase and sale of identical amounts of one
currency for another with two different value dates (normally spot to forward).[1]; see Foreign exchange
derivative.Contents [hide]

1 Structure

2 Uses

3 Pricing

4 Related instruments

5 See also

6 References

[edit]
Structure

A forex swap consists of two legs:

a spot foreign exchange transaction, and

a forward foreign exchange transaction.

These two legs are executed simultaneously for the same quantity, and therefore offset each other.

It is also common to trade forward-forward, where both transactions are for (different) forward dates.

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Uses

By far and away the most common use of FX swaps is for institutions to fund their foreign exchange
balances.

Once a foreign exchange transaction settles, the holder is left with a positive (or long) position in one
currency, and a negative (or short) position in another. In order to collect or pay any overnight interest
due on these foreign balances, at the end of every day institutions will close out any foreign balances
and re-institute them for the following day. To do this they typically use tom-next swaps, buying (selling)
a foreign amount settling tomorrow, and selling (buying) it back settling the day after.

The interest collected or paid every night is referred to as the cost of carry. As currency traders know
roughly how much holding a currency position will make or cost on a daily basis, specific trades are put
on based on this; these are referred to as carry trades.

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Pricing

The relationship between spot and forward is as follows:

where:

F = forward rate

S = spot rate

r1 = simple interest rate of the term currency

r2 = simple interest rate of the base currency

T = tenor (calculated according to the appropriate day count convention)

The forward points or swap points are quoted as the difference between forward and spot, F - S, and is
expressed as the following:

where r1 and r2 are small. Thus, the absolute value of the swap points increases when the interest rate
differential gets larger, and vice versa