Topic 7:

FX Swaps
© Eunice Ho
Diploma in Banking and Finance
School of Business
Singapore Polytechnic

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Topic outline
1. Market for FX Swaps
2. Define FX swaps
3. Reading FX Swap quote
4. Types of FX swaps
5. Characteristics of FX Swap transactions

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Size of the Swap Market
• Survey by BIS in 2019 showed the daily turnover for
FX swaps was $3.2 trillion.
Currency swap was $108 billion.

• The four most common currencies used to

denominate swaps are the euro, U.S. dollar,
Japanese yen, and the British pound sterling.

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FX turnover by instrument

Source: BIS Triennial Central Bank Survey (2019) 4

FX turnover by counterparty

Source: BIS Triennial Central Bank Survey (2019) 5

FX requirements
•A German company needs to pay USD to supplier
now at spot rate for goods received.
• only receive USD 3 months later from customer
abroad.

- USD + USD

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Possible funding strategies
1. Using FX,
 Buy USD at spot rate (sell EUR)
 3 mth later to sell USD (buy EUR)

2. Using MM,
 Borrow 3mths USD loan
 Repay loan upon receiving USD trade
receivable
3. Using FX swap
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 Foreign Exchange Swaps
• FX swap agreement is a contract whereby one
currency is exchanged (sold or purchased) for
another, and re-exchange (swap) the same
currencies at a later date.
• FX swap has two legs:
(1) a spot transaction and
(2) a forward transaction
• Both transactions are executed simultaneously for
the same amount, and therefore offset each other.
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Foreign Exchange Swaps
• The 2 legs:
(1) An initial exchange of two currencies on a near
leg date.
(2) A later reverse-direction exchange of the same
two currencies on a far leg date.

• E.g.The German company needs to pay to USD at

spot rate now to pay supplier, but it would only
receive USD 3 months later from customer abroad:
(1) sell EUR against USD for spot delivery
(2) buy EUR against USD for delivery 3mths later
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Foreign Exchange Swaps (cont)
Resulting in the following:

Near Leg Far Leg

(1st leg) (2nd leg) 10
Reading FX swap quote
BID
Sell/Buy Base currency = Buy/Sell Foreign currency

1. Sell base currency on earlier date (1st leg) at an

exchange rate (spot rate).

2.Buy base currency on maturity (2nd leg) at an

exchange rate (forward rate).
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Reading FX swap quote (cont)
OFFER
Buy/ Sell Base currency = Sell/Buy Foreign currency

1. Buy base currency on earlier date (1st leg) at an

exchange rate (spot rate).

2. Sell base currency on maturity (2nd leg) at an

exchange rate (forward rate).
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Reading FX swap quote (example)
Bid Offer
3 mth USD/SGD swap 190 - 180 (Discount swap)
Sell/Buy
1) At 190, market maker is willing to sell USD against
SGD at spot rate for spot day (T+2)
2) Buy USD against SGD at 190 pips discount on
maturity.
Buy/Sell
1) At 180, market maker is willing to buy USD
against SGD at spot rate for spot day
2) Sell USD against SGD at 180 pips discount on
maturity 13
Types of FX swaps

1. Discount FX swaps

2. Par FX swap

3. Premium FX swaps

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Types of FX swaps (cont)
-25 -15 0 +10 +30

Discount Premium
swap swap
PAR

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Types of FX swaps (cont)
• Discount 1 mth 25 - 15
Bid pips > Offer pips 2 mth 40 - 30
3 mth 55 - 45
• Par swap Zero swap rate

• Premium 1 mth 10 - 20
2 mth 20 - 30
Bid pips < Offer pips
3 mth 55 - 65
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 FX swaps pricing

• Transacted based on difference in

prices (spot & forward rates)
measured in pips.

• discount = pips deducted from spot

• par = no change from spot
• premium = pips added to spot
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Discount swap
• 1 mth USD/SGD Swap: 30 – 20
Sell/Buy Buy/Sell
• Market maker quoted 30 – 20
Bid > Offer
• Market maker will buy forward USD at spot less 30
pips and sell forward USD at spot less 20 pips

• Forward rate is trading at discount because:

Base currency Foreign currency
interest rate > interest rate
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Discount swap (cont)
Sell/Buy Buy/Sell
Market maker quoted 30 - 20
S/B: Sell Base currency in leg 1
Buy Base currency in leg 2

Buy/Sell
Market hitter takes bid 30
B/S: Buy Base currency in leg 1
Sell Base currency in leg 2
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Discount swap (cont)
• Market maker will fix rates for both 1st & 2nd
leg
• spot date as……. , with spot rate as 1.2630
• forward date as…….., with forward rate as 30
pips less hence
1.2630
 0.0030
1.2600

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Discount swap (cont)

Meaning market maker Sell/Buy

• Sell USD/SGD at 1.2630 on spot date
• Buy USD/SGD at 1.2600 on 1 month forward
delivery date

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Discount swap (cont)
Cash position
-USD +USD

spot date 1 mth later

+SGD -SGD

1st leg 2nd leg

1.2630 - 0.0030 = 1.2600
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Discount swap (exercise)

Bank A swap quote Bank B takes the offer

1 mth USD/SGD: 30 – 25 side for SGD 10 million.

Spot rate USD/SGD: 1.3625 - 35

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Discount swap (exercise) cont

Bank A’s position:

• Bank A quoted 30 - 25 indicating,
at 30, it is willing to do Sell/Buy USD
at 25, it is willing to do Buy/Sell USD
• Since the deal is transacted in terms of
SGD, Bank A actually did Sell/Buy SGD

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Discount swap (exercise) cont

Bank B’s position:

• Bank B takes the offer at 25 and Sell/Buy
USD/SGD
• Since the deal is transacted in terms of
SGD 10 million
• Bank B actually did a Buy/Sell SGD/USD.

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Discount swap (exercise) cont

Bank A will fix the rates:

Spot rate 1.3630

Swap pips  0.0025
Forward rate 1.3605

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Discount swap (exercise) cont
Bank B’s cashflow:
•Spot date -USD 7,336,757
+SGD 10,000,000

•Forward date +USD 7,350,239

-SGD 10,000,000

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Premium swap
• 1 mth EUR/USD Swap: 10 - 20
Sell/Buy Buy/Sell
• Market maker quoted 10 - 20
Bid < Offer
• Market maker will buy forward EUR at spot +10
pips and sell forward EUR at spot +20 pips
• Forward rate is trading at premium because:
Base currency Foreign currency
interest rate < interest rate
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Premium swap (cont)
Sell/Buy Buy/Sell
Market maker quoted 10 - 20
B/S: Buy Base currency in leg 1
Sell Base currency in leg 2

Sell/Buy
Market hitter takes offer 20
S/B: Sell Base currency in leg 1
Buy Base currency in leg 2
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Premium swap (cont)
• Market maker will fix rates for both 1st & 2nd
leg
• Spot date as……. , with spot rate as 0.8900
• Forward date as ........,with forward rate as 20
pips more hence
0.8900
+ 0.0020
0.8920

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Premium swap (cont)

Meaning market maker Buy/Sell

• Buy EUR/USD at 0.8900 on spot date
• Sell EUR/USD at 0.8920 on forward date

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 Premium swap (exercise)

• Bank ABC quoted • Bank XYZ takes the

3 mths GBP/USD: offer side of the
165 - 175 swap quote for
GBP 10 million.

Spot rate GBP/USD at 1.2000

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Premium swap (exercise) cont
Bank ABC’s position:
• Bank ABC quoted 165 - 175 indicating,
at 165, it is willing to do Sell/Buy GBP/USD
at 175, it is willing to do Buy/Sell GBP/USD

Bank XYZ’s position:

• Bank XYZ takes the offer at 175 pips and
• did a Sell/Buy GBP/USD

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Premium swap (exercise) cont
Bank ABC will fix rates
•GBP/USD spot rate 1.2000
•Swap pips + 0.0175
•Forward rate 1.2175

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Premium swap (exercise) cont
Bank XYZ’s cashflow:
•Spot date -GBP 10,000,000
+USD 12,000,000

•Forward date +GBP 10,000,000

-USD 12,175,000

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Par FX swap

PAR
only at one point
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Par swap
• Where the deal is done at zero swap point
• 1 mth USD/AUD Swap 0 – 10

Sell/Buy Buy/Sell
• Market maker quoted 0 – 10

Forward rate is trading at par because:

Base currency Foreign currency
interest rate = interest rate
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Par swap (cont)
Sell/Buy Buy/Sell
Market maker quoted 0 - 10
S/B: Sell Base currency in leg 1
Buy Base currency in leg 2

Buy/Sell
Market hitter takes bid 0
B/S: Buy Base currency in leg 1
Sell Base currency in leg 2
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Par swap (cont)
Market maker will fix rates
• for both 1st & 2nd leg as usual
• spot date as.........., with spot rate as
1.4500
• forward date as ........, with forward
rate as 0 pip difference, i.e. same as
spot rate 1.4500
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Par swap (cont)
Market maker will fix rates
•USD/AUD mid spot rate 1.4500
•Swap pips 0.0000
•Forward rate 1.4500

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Par swap (exercise) cont
Bank A quoted: Bank B:
• 1 mth USD/JPY: 10 - 0 • I take offer
USD 10 million

Spot rate USD/JPY 108.93 - 07 41

Par swap (exercise) cont

The FX swap deal is closed at:

• par
• Bank A will Buy/Sell USD/JPY
• Bank B will Sell/Buy USD/JPY
• for USD 10 million

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Par swap (exercise) cont
Bank A will fix rates
• Buy spot mid-rate USD/JPY at 109.00
• Sell 1 mth forward USD/JPY at 109.00
• for USD 10 million
• with payment instructions

(note that JPY is quoted to 2 dec.pl)

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Characteristics of FX Swap
transactions
• Relationship between the 3 rates:
– Spot rate (1st leg fixing)
– Swap rate (transacted / quoted rate)
– Forward rate (2nd leg fixing)

• Interest differential between

countries is the reason for discount,
par & premium FX swaps.
• Swaps are traded OTC.
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References

• ACT Learning Academy, study centre of the Association of

Corporate Treasurers (ACT)
• BIS Quarterly review, FX Swaps and Forwards (2016)
• BIS Quarterly review, Mechanics of FX Swaps and Currency Swap
(2016)

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