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FOREIGN EXCHANGE SWAP TRANSACTION

Definition

A foreign exchange swap transaction can be regarded as being composed of two transactions with the same amounts, different value dates and in different ways. Therefore, a foreign exchange swap transaction has a value date ahead and another behind and two agreed exchange rates. In the foreign exchange swap transaction, the customer and the Bank convert a currency into another as per agreed exchange rate and make settlement of funds on the first value date and in accordance with another agreed rate, convert the above-mentioned two currencies in opposite directions and make settlement of funds on the second value date. The most common foreign exchange swap transaction is to combine a spot transaction with a forward transaction. This is a foreign exchange transaction in which the customer, at the time sold Currency A and bought Currency B, buys the forward Currency A and sells the forward Currency B in converse directions.

Functions

• Adjusting the value date: When the customer, having finalized the foreign exchange forward transaction, needs to make settlement ahead of time due to some reasons, or as a result of insufficient funds or due to other reasons he cannot make due settlement and needs to extend the time, he may adjust the original time of settlement by way of making foreign exchange swaps.

• Guarding against the risks: If the customer holds Currency A at present and needs Currency B, but after a period of time he is to take back Currency B and convert it into Currency A, he can fix the costs in terms of foreign exchange and guard against the risks by way of making foreign exchange swaps.

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