What does an FX swap involve?

An FX swap involves a simultaneous spot and forward transaction. In practice, this means that two parties agree to exchange a specific amount of one currency for another currency at the current spot exchange rate, with the agreement to reverse the transaction at a later date via a forward exchange rate. This structure allows participants to manage their currency exposure efficiently and provides liquidity in the foreign exchange market.

In essence, the FX swap consists of two legs: the first leg is the initial exchange at the spot rate, and the second leg is the reversal of that exchange at a specified future date and rate. This dual nature of the transaction is what differentiates an FX swap from other types of currency transactions such as outright spot trades or forward contracts alone. The simultaneous execution of both legs emphasizes its hybrid characteristic, involving both immediate currency needs and future planning.