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:
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.
|trade||date||type of operation||amount in Euros||party to the trade||currency||
|execution||30 Mar||Forward||100,000||sell||30 Jun||27.00|
|settlement||30 Jun||Swap/Spot||100,000||buy||30 Jun||27.21|
|execution||30 Jun||Swap/Forward||100,000||sell||14 Jul||27.208|
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.