Currency Swap: A Simultaneous Spot and Forward Transaction

Updated on May 8, 2020
one2get2no profile image

Retired from investment banking and teaching, Philip has written several books on investing.

A swap transaction is a simultaneous forex spot purchase or sale transaction together with a forex forward purchase or sale transaction. In the forex market, a swap transaction is sometimes referred to as a sell and buy or a buy and sell.

Let’s look at a typical swap transaction. On January 5th, a trader enters into a $/Yen swap transaction (90-80) and buys $1,000,000 at 99.80 and at the same time agrees to sell $1,000,000 at 98.90 (spot 99.80 - 90 swap points) one month later on February 5th. Let’s look at the cash flows for this transaction.

January 5th
February 5th
-Yen 99,800,000
+Yen 98,900,000

One of the main features of a swap transaction is that there is no currency exposure as the spot transaction exactly matches the opposite forward transaction.

This is because, if the spot rate moves from 99.80 to 99.60, the forward leg of the currency swap will move in tandem so as to keep the 90 swap points differential—which reflects the interest rate differential between the dollar and the Yen.

  • Spot $/Yen 99.80 -90 swap points forward rate $/Yen 98.90
  • Spot $/Yen 98.90 -90 swap points forward rate $/Yen 98.00

The $/Yen interest rate differential remains the same and there is no currency exposure.

How Is a Swap Quoted?

£/$ spot rate is 1.3340 - 1.3345, and a corporate treasurer calls a bank and asks for a £/$ one-month swap quote. The bank quotes 130-120 one-month swap rate. Notice that the swap rate is quoted exactly the same as a one-month forward rate. The corporate treasurer wants to buy and sell sterling for one month. As he is selling sterling forward, he would take the bank's bid rate of 130 swap points. Now, for the buy side of the transaction, the bank would normally use a mid-rate between the bid and offer spot rate. As we discussed before, as long as the difference between the spot rate and the forward rate is the quoted swap points—in this case 130 swap points—it doesn't matter where the level of the spot rate is.

So, the corporate treasurer has sold sterling at 130 swap points one month forward. What is the outright forward rate? If the quoted forward points (in this case 130-120) are descending from left to right, then the base currency, in this case the sterling, is at a discount forward (sterling interest rates will be higher than dollar interest rates), and the points are deducted from the spot rate. If the forward points ascend from left to right, the points are added to the spot rate.

Let's look at the cash flows in this example and assume that the corporate treasurer wants to buy £1,000,000 and sell £1,000,000 on the forward leg of the swap.

Currencies Spot/Forward
£ spot
+ 1,000,000
$ spot
- 1,334,200
£ forward
- 1,000,000
$ forward
+ 1,321,200

Why Use a Currency Swap?

There are four main reasons why a company might want to do a currency swap. The first and most likely one is to speculate on a change in interest differentials. For example, a corporate treasurer might have sterling investments or assets and have dollar liabilities. The treasurer might feel that the interest differential between the Uk and the USA might narrow over the next month. The company might want do a one-month swap and sell the sterling at spot and buy it back forward.

£/$ swap quotes = spot 1.3350-60 and one month forward 150 - 140

The company sells £15,000,000 at 1.3355 spot and buys $20,032,500

The company buys £15,000,000 at 1.3215 forward and sells $19,822,500

Let's assume that during the day the UK interest rates were lower. The company asks its bank for a one-month currency swap quote. The bank quotes 110-100, showing that interest rates have narrowed. The company then does an opposite swap and buys sterling at spot and sells the sterling forward at 110 swap points. Let's look at all the cash flows, assuming the spot rate is around 1.3350. From the table below, you will see that the company makes $45,000 profit on the back-to back currency swaps.

Spot Date
Swap Points
Forward Date
February 1st 2010
March 1st 2010

Funding Operations

A company might find it easier to borrow dollars offshore for a three month period rather than in its domestic market. Borrowing dollars using a swap transaction allows them to do this without incurring any currency risk. In essence they would buy the dollars they needed at spot and sell them three months forward.

Forward Extensions and Rollovers

A UK company has contracted to buy goods at a certain date from Japan paying for the goods in yen. For some reason the shipment is delayed for a few weeks and the company does not want to sit on its yen as it will have a currency exposure. So it can enter into a currency swap and sell the Yen at spot for sterling and buy the yen back again when they need them. In this way the company does not have any currency exposure.

Interest Arbitrage

When a company takes a view on the future interest differentials between two currencies they can use currency swaps for a forward against forward transaction. This is a form of interest arbitrage. The forward against forward transaction involves a buy/sell or sell/buy swap for one maturing and an opposite swap for a different maturity. This is how the cash flows might look assuming a $/Yen forward against forward transaction.

January 18th Spot +$1M - Yen 99,500,000 at 99.50

February 18th Forward -$1MM + Yen 98,900,000 at 98.90

January 18th Spot -$1M + Yen 99,600,000 at 99.60

April 19th Forward +$1M - Yen 98,100,000 at 98.10

Making a profit of Yen 900,000 (approx $9,000) on the forward against forward transaction.

This article is accurate and true to the best of the author’s knowledge. Content is for informational or entertainment purposes only and does not substitute for personal counsel or professional advice in business, financial, legal, or technical matters.


    0 of 8192 characters used
    Post Comment
    • one2get2no profile imageAUTHOR

      Philip Cooper 

      9 years ago from Olney

      As you are selling the currency you would use the pips on the right side of the quote. Therefore if the dollar was at a premium forward they would be the highest pips however if the dollar was at a discount forward the pips on the right would be lower than the pips on the left.

    • profile image


      9 years ago

      If am selling and buying a currency against USD let say for example USD/CZK, probably on the near leg i will sell CZK and buy the CZK on the far i will buy the CZK back and sell USD.

      I should go for the highest swap points i find between the quotes isn't that right ?

    • profile image


      10 years ago

      One thing to note about currency swaps is that unlike interest rate swaps, the currency swaps do involve an exchange of principal. The exchange of principal on the notional amounts is done at market rates.

    • one2get2no profile imageAUTHOR

      Philip Cooper 

      10 years ago from Olney

      Thank you for your comment...:)

    • Rismayanti profile image


      10 years ago from Tropical Island

      thanks for share.. nice hub

    • one2get2no profile imageAUTHOR

      Philip Cooper 

      10 years ago from Olney

      Thank you Billy I tried to make it as simple as possible.

    • billyaustindillon profile image


      10 years ago

      Excellent explanation of swaps thanks.


    This website uses cookies

    As a user in the EEA, your approval is needed on a few things. To provide a better website experience, uses cookies (and other similar technologies) and may collect, process, and share personal data. Please choose which areas of our service you consent to our doing so.

    For more information on managing or withdrawing consents and how we handle data, visit our Privacy Policy at:

    Show Details
    HubPages Device IDThis is used to identify particular browsers or devices when the access the service, and is used for security reasons.
    LoginThis is necessary to sign in to the HubPages Service.
    Google RecaptchaThis is used to prevent bots and spam. (Privacy Policy)
    AkismetThis is used to detect comment spam. (Privacy Policy)
    HubPages Google AnalyticsThis is used to provide data on traffic to our website, all personally identifyable data is anonymized. (Privacy Policy)
    HubPages Traffic PixelThis is used to collect data on traffic to articles and other pages on our site. Unless you are signed in to a HubPages account, all personally identifiable information is anonymized.
    Amazon Web ServicesThis is a cloud services platform that we used to host our service. (Privacy Policy)
    CloudflareThis is a cloud CDN service that we use to efficiently deliver files required for our service to operate such as javascript, cascading style sheets, images, and videos. (Privacy Policy)
    Google Hosted LibrariesJavascript software libraries such as jQuery are loaded at endpoints on the or domains, for performance and efficiency reasons. (Privacy Policy)
    Google Custom SearchThis is feature allows you to search the site. (Privacy Policy)
    Google MapsSome articles have Google Maps embedded in them. (Privacy Policy)
    Google ChartsThis is used to display charts and graphs on articles and the author center. (Privacy Policy)
    Google AdSense Host APIThis service allows you to sign up for or associate a Google AdSense account with HubPages, so that you can earn money from ads on your articles. No data is shared unless you engage with this feature. (Privacy Policy)
    Google YouTubeSome articles have YouTube videos embedded in them. (Privacy Policy)
    VimeoSome articles have Vimeo videos embedded in them. (Privacy Policy)
    PaypalThis is used for a registered author who enrolls in the HubPages Earnings program and requests to be paid via PayPal. No data is shared with Paypal unless you engage with this feature. (Privacy Policy)
    Facebook LoginYou can use this to streamline signing up for, or signing in to your Hubpages account. No data is shared with Facebook unless you engage with this feature. (Privacy Policy)
    MavenThis supports the Maven widget and search functionality. (Privacy Policy)
    Google AdSenseThis is an ad network. (Privacy Policy)
    Google DoubleClickGoogle provides ad serving technology and runs an ad network. (Privacy Policy)
    Index ExchangeThis is an ad network. (Privacy Policy)
    SovrnThis is an ad network. (Privacy Policy)
    Facebook AdsThis is an ad network. (Privacy Policy)
    Amazon Unified Ad MarketplaceThis is an ad network. (Privacy Policy)
    AppNexusThis is an ad network. (Privacy Policy)
    OpenxThis is an ad network. (Privacy Policy)
    Rubicon ProjectThis is an ad network. (Privacy Policy)
    TripleLiftThis is an ad network. (Privacy Policy)
    Say MediaWe partner with Say Media to deliver ad campaigns on our sites. (Privacy Policy)
    Remarketing PixelsWe may use remarketing pixels from advertising networks such as Google AdWords, Bing Ads, and Facebook in order to advertise the HubPages Service to people that have visited our sites.
    Conversion Tracking PixelsWe may use conversion tracking pixels from advertising networks such as Google AdWords, Bing Ads, and Facebook in order to identify when an advertisement has successfully resulted in the desired action, such as signing up for the HubPages Service or publishing an article on the HubPages Service.
    Author Google AnalyticsThis is used to provide traffic data and reports to the authors of articles on the HubPages Service. (Privacy Policy)
    ComscoreComScore is a media measurement and analytics company providing marketing data and analytics to enterprises, media and advertising agencies, and publishers. Non-consent will result in ComScore only processing obfuscated personal data. (Privacy Policy)
    Amazon Tracking PixelSome articles display amazon products as part of the Amazon Affiliate program, this pixel provides traffic statistics for those products (Privacy Policy)
    ClickscoThis is a data management platform studying reader behavior (Privacy Policy)