Question
What is a Foreign Exchange swap?
A. An FX swap is an agreement to exchange two currencies on an initial settlement date and reverse the exchange at a future date using exchange rates agreed in advance.
It combines a near transaction, commonly at the spot rate, with an opposite forward transaction. The difference between the exchange rates largely reflects the interest rate differential between the currencies. FX swaps are commonly used by banks and businesses to manage foreign currency liquidity and short term funding without taking an unhedged currency position from the paired exchange transactions.