Markets

Swap Contract

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A Swap Contract is an agreement to buy and sell one currency for another by exchanging the notional on two separate dates. The difference in exchange rates between the near and far dates are referred to as the swap points.

How it works

UK-based company Acme Ltd is receiving a loan to buy an office in the US as part of their global expansion plans. To get started they need to convert the GBP loan of 1,000,000 into USD but plan to repay the loan in one year using the USD revenue from the new office.

This means they’ll need to convert USD to GBP in time to repay the original loan. To do this, Acme Ltd executes a Swap contract:

Variables

Key benefits

Swap Contracts may be used to fulfill temporary cash-shortfalls in one currency for another, whilst helping mitigate against currency fluctuations

Swap Contracts may be used to mitigate fluctuations in the valuation of assets or liabilities held in noncore currencies

Securing spot and forward rates simultaneously helps to hedge against the risk of market fluctuations over the contract period, giving clarity on future cashflows

Tailored to specific objectives, giving flexibility to decide the notional amount, currencies and the settlement date

Key risks

  • You are obliged to fulfil the agreed terms under the FX swap entered into even if your requirements change during the term of the FX swap
  • Unable to participate in favourable market movements with respect to the contract
  • Should the contract no longer be required, the cost of unwind (which may be substantial) will be determined by the prevailing market rate at the time and be payable by the client
  • The mark to market value of the contract will become positive or negative throughout the duration of the contract in line with market fluctuations
  • By entering into a FX swap with us, you become subject to our credit risk in respect of our ability to perform our obligations under the FX swap contract. You will not receive any payment under the FX Swap if we become insolvent or otherwise unable to pay.

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