How do our Forex operations work in general? In fact, we do not buy or sell currency pairs.

When making a transaction, we buy one of the currencies and sell the second one.

But, of course, we may not have the currency that we are selling (for example, if we are talking about cross pairs like , and the account is opened in US dollars).

Trading on the Forex market is possible only thanks to the swap.

What is a currency swap

Swap(swap) is a concept that is often encountered by those who work in the market. The essence of this phenomenon lies in the fact that when opening transactions in the foreign exchange market, we simultaneously receive a loan and make a deposit. On the first point, we need to pay interest, and on the second, the bank already pays interest to us.

How does the deal actually work?

At the central bank of the state whose currency we are selling, take out a loan. Accordingly, interest is charged on it, which we need to pay. Then, we exchange the currency bought on credit for another (in accordance with our order). In our example, we change pounds to euros. Accordingly, we buy euros for pounds. And that means taking out a loan Bank of England to buy the Common Currency.

As for the object of purchase, that is, the euro, we do not receive the currency in hand, but it remains in European Central Bank, as if on a deposit, for which the ECB charges interest to us. As a result, the swap will depend on the difference in interest rates. In our case, the Bank of England has higher than the ECB, respectively, the swap will be negative. In other situations, the swap can be positive. Everything depends on the monetary policy of the Central Bank.

Swaps also make Forex trading possible as it exists. Without such an aspect as a swap, we could only buy currencies, but not sell them in any way (after all, we may not have the necessary currency on deposit).

Now let's define what a currency swap is. This is the difference in interest rates between the central banks whose currency you buy and sell. The value of this parameter can be positive or negative. Everything depends on the rates. Sometimes there is no swap at all if the rates in the Central Bank are equal.

Currency swap in simple terms

- These are types of transactions that involve two transactions. That is, this is not an ordinary operation in which party A sells currency to party B, and this is where the relationship between them ends. In swap transactions, party A sells the currency to party B. Subsequently, the reverse operation is carried out, that is, party B sells the currency to party A.

An important factor is the exchange rates at which the exchange is carried out and the interest rates at which commissions are charged for providing currencies for a certain period. The main players in the swap market are central banks. True, there are also internal operations. They involve transactions between central and commercial banks.

• As for external swap transactions, they are carried out between commercial banks and central banks of other countries.

In order to simplify the system of exchange, central banks may agree on the so-called swap lines- This is the exchange rate that is set between the Central Bank of different countries. Such agreements also provide for deadlines, restrictions on operations, and so on. Typically, such swap lines are valid for one year.

Purpose of currency swaps

When concluding transactions on currency swaps, central banks pursue two main goals - mutual assistance and the development of trade. Mutual assistance can be very useful when there are not enough resources in foreign currency to pay off obligations. As for the second purpose, it allows countries to obtain foreign currency for conducting international economic activities.

Let's give an example. Suppose a US company is trying to enter the Brazilian market. And the Brazilian company, on the contrary, is trying to enter the US market. At the same time, banks in Brazil do not express interest in lending to foreign companies. The only solution in this situation is to obtain loans at high interest rates. At the same time, a Brazilian company finds itself in a similar situation. She will be able to count on a loan in the United States at a high interest rate.

Naturally, this situation does not suit either one or the other side. Therefore, they can take out loans for each other in their banks at lower interest rates. After that, the companies exchange funds (this is where the swap starts). After the companies sign the agreement, they will receive foreign currencies on their balance sheet at the exchange rate that is set at the time of the transaction.

Another important point worth paying attention to is the need for companies to make interest payments in their banks. As a result, loan payments will equalize, and this is one of the important advantages of currency swaps.

The undoubted advantage of such a currency swap is that companies take loans at lower interest rates (in fact, loans are taken by local companies at interest rates for residents).

For which traders is swap relevant?

Swaps are charged only when positions are rolled over to the next trading day. Accordingly, they are not relevant for all traders. Those who work intraday may not pay them at allAttention. Medium-term speculators are already to some extent dependent on the swap. But if the position is held for several weeks, the impact of this aspect on the result will not be so significant.

Most of all, long-term workers should worry or. But here there is one point that is worth paying attention to. The fact is that the difference in interest rates between most central banks is negligible. This is especially true of the Big Seven. Accordingly, the profit or loss associated with swap accrual will be insignificant.

Islamic accounts

On the other hand, position traders have the opportunity to avoid such charges altogether.

There are so-called swap-free or Islamic accounts. Traders who choose them can even trade long-term without any charges. As you can already guess from the name, such accounts were invented specifically for people who profess Islam. The fact is that in this religion you cannot earn on bets. Accordingly, swaps do not allow Muslims to work with some brokers. This is what prompted companies to open accounts that do not provide for charges for transferring transactions to the next day.

By the way, not only those who profess Islam can use such accounts. Brokers have no such restrictions. Any trader can open a swap-free account. And such accounts are very popular among medium- and long-term clients.

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Thus, you can earn not only on currency pairs, but also on the most famous securities and other assets. Minimum deposit to open an account $200 .

Should traders be wary of swaps?

Some FX traders fear that swaps could wipe out their potential profits. However, in reality, this is far from the case. The fact is that even with a long-term retention of the transaction, such commissions are unlikely to significantly affect the final result. Much more significant damage can cause an expanding spread.

True, making money on swaps will also fail for the same reason. Accruals are too small to significantly improve your financial situation. Therefore, you should not assume that if you opened a position with a wrong forecast, a positive currency swap will save the day. It can only slightly improve your situation and nothing more.

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We note right away that today there are several types of swaps - interest, commodity, credit, and currency.

Each has its own characteristics, advantages and disadvantages. In this article, we will not consider all options. Let's pay attention only to the most popular - currency swap.

What ?

Many stock market participants have heard this definition, but few people know its meaning. A currency swap is a combination of two currency exchange transactions. The amounts of both transactions are the same, but the value dates are different. If we consider the option with a swap, then here the value date means the date of the next transaction. In turn, the time of the reverse operation has a different name - the date of completion of the swap. In most cases, we are talking about transactions with the purchase and sale of currencies. If a market participant first buys a currency and then sells it, then the swap is called “buy/sell”. In case of a reverse transaction, respectively - "sale / purchase" (first, the sale of the currency is carried out, and then its purchase). Most often, one (bank) undertakes the implementation of a currency swap. This is called a "pure swap". There are situations when several banks act as counterparties, but the terms of operations are not violated. This type of swap is called “constructed”.

Types of currency swaps

A currency swap is a very interesting instrument that can be conditionally divided into three main types (taking into account the terms of execution):

1) Standard swap. In this scenario, the nearest deal is , and the next deal is forward;

2) Forward swap. Here everything happens the other way around. The nearest transaction is concluded on a forward basis (value time is further than spot). In turn, the reverse forward operation is already implemented on the terms of a late forward;

3) One day (short) swap is one of the most popular types of currency swaps. It assumes that the time of both operations will fall on the date from the spot. For example, one operation takes place according to the “spot-tom” type, and the next one takes place on the second day after the conclusion of the spot transaction. Many people think that currency swaps do not belong to the money market because of their foreign exchange nature. This is not so - they are a full-fledged element of it.

After considering the features and types of currency swaps, questions may arise: “Who needs it? Who is using this tool? Three interested market participants can be distinguished here:

1) Banks. We have already mentioned that a currency swap is most often a transaction with one counterparty, which is the bank. The latter carries out transactions with currencies at fixed rates. At the same time, the risks of operations are minimal.

2) Forward traders. These market participants, when making transactions with currency, pursue a number of goals:

Establish cash management in the dealing room;

It’s good to “weld” on the difference in interest rates;

Conduct arbitrage transactions. Most often, you can count on the difference in prices for various financial instruments;

Provide full service to market participants, both external and internal.

With regard to a swap, the date of execution of a closer transaction is called the value date, and the date of execution of a more distant reverse transaction is the swap end date (maturity). Most of the currency swap transactions are concluded for a period of up to 1 year.

If the conversion transaction closest in date is a purchase of a currency (usually the base one), and the more distant one is a sale of a currency, such a swap is called "bought/sold"(English) buy and sell swap). If, at the beginning, a transaction is carried out to sell the currency, and the reverse transaction is the purchase of the currency, this swap will be called "sold/bought"(sell and buy swap).

As a rule, a currency swap transaction is carried out with one counterparty, that is, both conversion operations are carried out with the same bank. This so-called net swap(pure swap). However, it is allowed to call a swap a combination of two opposite conversion transactions with different value dates for the same amount, concluded with different banks - this constructed swap(engineered swap).

Swap line

Swap types

By maturity, currency swaps can be divided into three types:

• Standard Swaps(from spot) - here the nearest value date is spot , the farthest value date is forward ;
• Short One Day Swaps(before spot) - here both dates of the trades included in the Swap deal fall on the dates before the spot. For example, for a Tom/Next deal, the first deal is settled on the value date Tom (Tomorrow), and the second deal is settled on the next (Next) business day (the second business day after the deal is made - spot).
• Forward swaps(after spot) - they are characterized by combinations of two outright transactions, when a transaction that is closer in terms of time is concluded on forward terms (the value date is later than spot), and the reverse transaction is concluded on terms of a later forward.

Currency swaps, despite the fact that in form they are conversion operations, in terms of their content they are related to money market operations (MM operations).

financial mathematics

The swap price is the difference between the rates of the legs of the swap - the rates of conversion transactions that form the swap.

A simplified swap can be presented in the form of two opposite transactions (for example, a deposit and a loan), which are exchanged by the parties in a transaction at agreed interest rates. Since the interest rates on deposits and loans are not equal, then - if the equivalents of the amounts on the first leg of the swap are equal and the terms of the conditional deposit transactions are equal - the interest payments will not be equivalent. It is the difference between them that determines the price of the swap.

The swap price is calculated based on:

• Differential of interest rates by currencies of conversion transactions,
• Swap maturity - the difference between the start and end dates of the swap,
• The rate for the first leg of the swap - the rate for the first conversion deal.

Swap Price Calculation

Swap difference calculation based on interest rates and exchange rates:

Swap difference where let

1. swap dates and trade term (in years):
   • 12/01/2008 and
   • 01.02.2009
   • Number of days (in years)
     1. USD = 62 / 360 = 0.172222222 (Act / 360)
     2. RUB = 31 / 366 + 31 / 365 = 0.16963096 (Act / Act)
        For a detailed description of the Day Count Convention, see WIKI:EN at Day Count Convention .
2. rates and spot rate
   • USD: 2 / 3
   • RUB: 12 ​​/ 14
   • USD/RUB: 29.0000 / 29.0500

Price or in paragraphs -

The swap difference is calculated in the same way: or in paragraphs -

Thus, the Bank, rounding up, will quote the swap as follows: , where

Swap Interest Rate Calculation

Calculation of the interest rate for the first currency of the pair

The interest rate for the price currency is known.

Currency swap(Currency Swap) is a currency transaction that combines the purchase or sale of a currency on a spot basis with the simultaneous sale (or purchase) of the same currency for a certain period on the terms , that is, a combination of two opposite ones for the same amounts, but with different value dates.

There are classic swap operations and their varieties in the form of option, currency-interest swaps, and the like. Classical swaps, depending on the sequence of performed spot and forward operations, are divided into report and deport. report is the sale of currency on a spot basis and the simultaneous purchase on a forward basis. Deport— purchase of currency on spot terms and sale on forward terms. If the purchase (sale) of a currency is carried out on the basis of two agreements at the "outright" rate, then such an operation is called "forward-forward" or "forward swap".

In the case of a swap deal, the execution date closer to the deal is called value date, and the date of execution of the reverse transaction remote in time is swap end date(maturity).

During the deport operation, the standard swap entry can be as follows: 6M USD/UAH b/s swap. This means that a certain amount of US dollars was bought for hryvnias on a spot basis and the same amount of dollars was sold for hryvnias at the outright rate for 6 months. (b / s - buy and sell - bought / sold).

During the report operation (sold / bought - sell and buy - s / b), the entry can be as follows: 6M USD / UAH s / b swap, that is, a certain amount of dollars was sold at the spot rate and the same amount was bought at the outright rate » with delivery in 6 months.

Depending on the terms of the agreement, "swap" is divided into:

1. ordinary (report and deport operations);
2. weekly - "swap" s / w (spot-week swap), if the first transaction is executed on the terms of "spot", and the second - on the terms of the weekly "forward";
3. one-day — "swap" t / n (tomorrow-next swap), if the first transaction is carried out with the value date "tomorrow", and the reverse - on the terms "spot";
4. forward ("forward-forward").

For classic currency swaps (report and deport), two exchange rates are used - spot and outright. The latter is determined by the standard method: the spot rate plus (minus) the forward margin (premium or discount).

Currency swap agreements are interbank transactions and have much in common with outright transactions. In practice, they are used much more often than simple forward transactions.

Recently, currency swaps are more widely used not only between commercial banks, but also between central banks, which can be considered as agreements on mutual lending in national currencies. To this end, in 1969, a multilateral system for the mutual exchange of currencies was created on the basis of the use of swap operations through Basel. The currency swap mechanism of the National Bank of Ukraine with commercial banks was used in 2009. During the banking crisis to stimulate refinancing and manage foreign exchange risk. From May 30, 2011, currency swaps began to be widely used in the domestic foreign exchange market both between banks and between banks and the central bank in order to conclude contracts for the sale of foreign currency for the hryvnia with the obligation to buy it back after a certain period of time at a predetermined rate.

The main purpose of using a currency swap is to provide financing for long-term obligations in foreign currency; hedging long-term currency risk; replacement of the currency in which the income from investments is received with another one at the choice of the investor; ensuring the conversion of exported capital into another currency.

Participants in SWAP operations

Currency swap transactions are most often carried out by banks (large). They are the dominant participant in the swap market. In this case, there is an exchange between banks of two currencies with a return to each other at the end of the transaction of the original currencies. The exchange is carried out in the form of two opposite currency transactions concluded simultaneously, but with different terms of delivery of currencies: SPOT - for one transaction and forward - for another (this scheme is shown in Fig. 2.) As a result, both banks receive at their disposal the purchased on the condition SPOT currency for the period until its sale under a futures transaction (6, pp. 78-84).

Rice. 2 Scheme of the swap operation

Swap operations are convenient for banks: they do not create an open position (the purchase is covered by the sale), they temporarily provide the necessary currency without the risk associated with a change in its exchange rate.

SWAP transactions are carried out between:

commercial banks (market-makers)

directly between central banks of countries

between commercial banks and the country's central bank

In the second case, they are mutual lending agreements in national currencies. Since 1969, a multilateral system of mutual exchange of currencies has been operating through the Bank for International Settlements in Basel based on the use of swap transactions, which is used by the central banks of countries to carry out effective foreign exchange interventions.

The admission of participants to the swap market is regulated by national legislation (6, pp. 41-50).

Currency interest rate swap

A cross-currency interest rate swap involves the exchange of interest payments in one currency for interest payments in another currency.

Cross-currency interest rate swaps typically involve an exchange of principal. The notional principal is exchanged at the start of the transaction, usually at the prevailing SPOT rate. Interest payments are made at a fixed, floating or zero coupon rate. At the expiration of the swap, the principal is exchanged in the opposite direction at the original spot rate (5, pp. 8-12).

In effect, a cross-currency interest rate swap allows a borrower or lender to exchange a loan in one currency for a loan in another currency without any currency risk. (currency risk does not arise only if the swap is held until its expiration date).

A cross-currency interest rate swap is essentially a spot transaction followed by a series of foreign exchange forwards.

The maturity of currency interest rate swaps is usually at least one year.

Use of cross-currency interest rate swaps

Example. JAP is a Japanese multinational company that needs to raise $100 million over 5 years to finance the construction of a facility in the US. JAP can borrow Japanese yen in the domestic market at a fixed five-year rate of 1.5%, but the cost of borrowing US dollars is LIBOR + 0.25%. Let's assume that the current USD/JPY spot rate is 110.00.

To raise 11 billion, JAP issues a 5-year Euroyen bond with a coupon rate of 1.5%. At the prevailing spot rate, the conditional principal amount of the Eurobond is equivalent to $100 million. The company needs dollars to finance the construction of the enterprise.

US bank ABC needs the equivalent of $100 million in Japanese yen to expand its operations. The bank would prefer to raise funds at a fixed rate in order to have certainty about future cash flows. ABC can raise dollars in the domestic market at LIBOR flat, but a five-year yen loan at a fixed rate will cost it 3.5%.

JAP and ABC decide to enter into a cross-currency interest rate swap that allows them to take advantage of favorable borrowing rates in their home markets. Provided that the credit ratings of both parties are the same, the savings from the transaction will be distributed between them approximately equally. In table. 1 presents the positions of both organizations (7, pp. 69-75).

Table 1. Positions of JAP and ABC bank

In order to get the kind of loan that is needed, organizations enter into a swap. Both organizations need to assess the risks associated with the possibility of default by the counterparty. If this happens, then the counterparty that did not receive the interest payment is still required to make payments on its underlying loan.

The role of market makers

Cross-currency interest rate swap agreements are almost never entered into directly by end users. This process most often involves a market maker and two unrelated clients who want to enter the swap, but not necessarily with each other. For example, the perceived credit risk associated with a direct swap agreement may not be acceptable to either party. The market maker bank, acting as an intermediary, offers customers a double swap, in which both parties receive an interest payment guarantee.

Rice. 3.

The intermediary receives a remuneration, the amount of which depends either on the amount of the notional principal amount, or on the spread of quoted prices for payments on the swap - the swap rate, or on both.

It is rare for a market maker to have the underlying asset needed to exchange the principal in a swap. Typically, a bank covers a position in a cross-currency interest rate swap with a counter contract with another counterparty, which allows you to manage currency and interest rate risks.

If the terms of the counter contract exactly match the terms of the original contract, the risk is completely eliminated. However, there are still credit risks associated with both counterparties.

Banks quote swap rates for current spot rates against 6-month LIBOR for US dollars. Bid and ask quotes are usually offered for a number of currencies. As an example below, in Table. 3, quotes are given for the British pound sterling.

Table 3. An example of quotes for the British pound sterling

These quotes mean that, for example, the bank is ready to enter a four-year swap at the current spot rate on the following terms:

• ? The Bank receives a fixed rate (ask) of 7.52% on British pounds and pays a floating 6-month LIBOR on US dollars;
• ? The bank pays a fixed rate (bid) of 7.48% on British pounds and receives a floating 6-month LIBOR rate.

By bringing together two cross-currency interest rate swaps, the market maker is effectively in the middle of a double swap.

Rice. four.

In the US, and to a lesser extent in the UK, swap rates are quoted on the yield of Treasury notes with the corresponding maturity.

For example, a market maker might quote a 5-year 8.00% Treasury swap as 70/75 over. This means that on a 5-year swap, the market maker is willing to pay a fixed rate of 8.70% or receive a fixed rate of 8.75%.

Cross-currency interest rate swaps should be compared on a comparable basis, that is, like-for-like.