Spot Currencies

Forex swaps are transactions involving the exchange of two cur-rency amounts on a specific date and a reverse exchange of the same amounts at a later date. Their purpose is to manage liquid¬ity and currency risk by executing foreign exchange transactions at the most appropriate moment. Effectively, the underlying amount is borrowed and lent simultaneously in two currencies, for example, by selling U.S. dollars for the Euro for spot value and agreeing to reverse the deal at a later date.
Since currency risk is replaced by credit risk, such transactions are different conceptually from Forex spot transactions. They are, however, closely linked because Forex swaps often are initiated to move the delivery date of a foreign currency originating from spot or outright forward transactions to a more optimal moment in time. By keeping maturities to less than a week and renewing swaps continuously, market participants maximize their flexibility in reacting to market events. For this reason, swaps tend to have shorter maturities than outright forwards. Swaps with maturities of up to one week account for 71 percent of deals, compared with 53 percent for outright forwards.