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Swaps

A swap agreement is a derivative transaction with foreign currency.

This fixed negotiated trade with foreign currency is composed of two parts. The trade results in the immediate purchase or sale of funds in currency A for a specific amount of funds in currency B.

The purchase or sale of the funds in currency B for a certain amount of funds in currency A then takes place as of a specific contractual future business day, at the swap rate agreed at the time of completing the given trade.

Conditions for executing a swap:

Signing of a Framework agreement about payment and investment services.
You are legally obliged to have LEI number.
Deposit of cash collateral or getting a Dealing limit.
Minimum amount per transaction is EUR 10,000 or equivalent in another currency.

By doing a forward contract, a company acquires immediate security against the future exchange rate at which the currency will be exchanged in 3 months (i.e. 30 June). This is the ideal solution if the forward exchange rate conforms to expected exchange rate trends and is a suitable instrument in terms of the financial planning of the company.
In the event that an importer or exporter has incorrectly estimated the payment dates of future receivables or obligations and at the same time has already made forward contracts against the receivable/payment, there is the option to extend (postpone the settlement date of the trade), or reduce (prematurely settle the trade) of the forward using a swap. The conditions and principle of setting the swap price is the same as with a forward, i.e. the forward rate differs from the spot rate by forward points.

When closing derivative transactions, the client undertakes selected types of risks (market - currency and interest, counterparty risk, liquidity risk, and leverage). The risks always depend on the purpose and method of using the derivative transactions. Before signing the General Agreement and concluding the trade, or at any time upon request, the traders will be happy to explain the different types of risks both verbally and in writing.

EXAMPLE

Exporter (based on the forward example):

The Client hedged using a forward based on initial parameters, where a foreign consumer had undertaken to pay EUR 100,000 by 30 June, i.e. by 30 June they will need to add EUR 100,000. The consumer reports that the payment for the goods will be delayed by 14 days, and therefore the client does a swap and extends the settlement terms of the originally negotiated forward by 14 days. By 30 June the client purchases EUR 100,000 at the present exchange rate, and thereby settles the original forward and at the same time, in the same moment, sells EUR 100,000 with a new settlement date 14 days from now. The value of the new forward exchange rate will be based on the current exchange rate, modified by forward points.

Illustrative example:

trade	date	type of operation	amount in Euros	party to the trade	currency	exchange rate EUR/CZK
execution	30 March	Forward	100,000	sell	30 June	23.980
settlement	30 June	Swap/Spot	100,000	buy	30 June	24.050
execution	30 June	Swap/Forward	100,000	sell	14 July	24.000

If, however, the company receives payment for goods in advance, the existing Forward may be settled in advance in full or in part using a Swap.

A swap may also be used if a company has excessive reserves of one currency and yet a deficit of a different currency which it requires to pay its obligations due. Using a swap, it can carry out two operations (spot and forward) where it temporarily purchases the insufficient currency by selling the surplus currency At the set date in the future, it conducts the opposite exchange at the previously agreed exchange rate.

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