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Swap Transactions

A swap transaction involves a spot transaction along with a corresponding forward contract that will ultimately reverse the spot transaction. Many forward contracts are negotiated for this purpose.

A swap transaction in the interbank market is the simultaneous purchase and sale of a given amount of foreign exchange for two different value dates. Both purchase and sale are conducted with the same counterparty. A common type of swap is a “spot against forward.”  The dealer buys a currency in the spot market and simultaneously sells the same amount back to the same bank in the forward market. Since this is executed as a single transaction with one counterparty, the dealer incurs no unexpected foreign exchange risk. Swap transactions and outright forwards combined made up 57% of all foreign exchange market activity in April 2001.

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