Foreign Exchange Swap

• Foreign Exchange Swap (or FX Swap) combines a spot transaction and a forward transaction
• It consists in a sale of one currency for another, with settlement on the spot value date at the latest and buyback/resale with settlement on forward value date
• The objective is to hedge FX and interest rate risks associated with development of specific exchange rates and/or interest rates
• Intended for individuals and legal entities, including municipalities – domiciled in the Czech Republic and abroad
• Both transactions are executed simultaneously
• Minimum amount for a single transaction is USD 20,000 or equivalent in another currency traded on the interbank market
• FX swap may also be used in a situation when a client hedged its FX exposure by FX forward; however, is unable to settle the payment at settlement date due to delayed incoming payment in the currency sold to the bank. The spot leg of the FX swap will deliver the currency amount required for the settlement of the original FX forward and the forward leg will extend the protection.

• Potential profit or loss of foreign-currency transactions is affected by exchange rate fluctuations
• Moreover, potential profit or loss is also affected by fluctuations of interest rates of FX swap currencies

Example

• Client negotiates FX swap with its bank
• Agreed forward exchange rate 27.950
• Risks are associated with the forward leg of the swap - the client sells EUR 1 million and purchases CZK, with settlement of the forward leg of the swap in 1 month
• As of the settlement date of the forward leg of the swap, the spot rate amounts to 28.000
  - Client incurred a loss of CZK 50,000
  - However, the loss represents hedging cost, provided the transaction was used as hedging. Hedging protects clients from significant exchange rate fluctuations that could result in substantial financial problems.