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Currency swap transaction

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Currency swap transaction (FX swap) helps to manage cash flows in different currencies more efficiently and avoid the impacts of exchange rate changes.By concluding this transaction, you agree with the bank to exchange a set amount of one currency for another for a specified period of time.

Currency swap transaction enables you to temporarily use one currency instead of another and then reverse the transaction. A currency swap transaction is often used to move the term of a concluded currency forward outright transaction to an earlier or later settlement date.

Basic terms of transaction

  • No minimum transaction amount
  • Transaction may be executed in installments, earlier or later than agreed
  • No additional fees are applied to the transactions

Example

Today, the company has earned a total of USD 100,000 from the goods sold.

The company will have to pay this amount to its suppliers after 3 months.

The company usually carries out its daily financial operations in euros; therefore, it concludes a foreign exchange swap transaction, i.e. it exchanges the available US dollars into the euros today and agrees that it will repurchase this amount after three months at a pre-agreed rate.

By concluding this transaction, the company avoids the risk related to exchange rate changes.

Related Risks

The major risk is related to currency value changes in the market because both parties must perform their obligations assumed under the transaction.

For instance, in case of a foreign currency swap transaction, once the parties to the transaction have agreed on a fixed exchange rate on a specific date, the currency buyer would incur a loss in the event of the market price of the currency decreases, whereas the currency seller would incur a loss if the market price of the currency increases.

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Markets in Financial Instruments Directive

The Markets in Financial Instruments Directive (MIFID) regulates the rendering of financial investment services has been effective in the European Union and the European Economic Community (EEC) since 2007. The requirements of MiFID are aimed to provide additional protection to investors and promote the transparency of financial markets in terms of transactions in financial instruments.

After 3rd January 2018, new rules of the Markets in Financial Instruments Directive 2014/65/EU (MiFID II) came into force and affect each investor who engages in transactions in financial instruments.

 

Please note that the data, examples and information on derivative financial instruments provided herein is for informational purposes only. This information has been prepared without consideration or regard of your knowledge or experience related to specific financial instruments and without having any information about your investment objectives or financial capacity to assume risks related to the conclusion of the transaction that meets your investment objectives; therefore, it cannot be construed as a personal investment recommendation, advice on trading in derivative financial instruments or investment research, order or invitation to buy or sell specific financial instruments and may not constitute any basis or part of any subsequent transaction.