Buy foreign currency today and sell it on a future date on previously agreed terms

FX Swap

  • Hedge against FX risk
  • Manage liquidity without FX risk

Benefits of entering into an FX swap

  1. Hedge against FX risk - agree on the exchange rate at which the currency will be traded on a future date
  2. Lock in stable and predictable cash flows because the future ones are known in advance due to fixing the exchange rate for FX trade
  3. Avoid a potential loss which may occur due to adverse exchange rate change
  4. Exchange the currency you do not need at the moment for the currency you do need without the impact of exchange rate change

What is an FX swap?

An FX swap is a product where the client and the bank agree on the simultaneous exchange of one currency for other on two different dates at previously agreed and fixed exchange rates.

With this product, the client has a possibility to sell (exchange) the currency which he/she does not need at the moment for other currency which he/she needs, while simultaneously agreeing on the re-purchase of the previously sold currency on the agreed future date at the agreed fixed exchange rates, neutralising the impact of exchange rate change on the re-purchase of the previously sold currency.

An FX swap comprises two simultaneous FX trades but it is used for liquidity management, with underlying sale of currency currently available to the client and purchase of the missing currency.

In order to enter into the transaction, it is necessary to:

Open an account with Erste Bank

Enter into a Framework Agreement

Complete the Client Categorisation Questionnaire

Be approved the limit (amount and tenor)

You expect ro receive a EUR payment in a month, but you need FX funds now for a payment of due liabilities.

In order to compensate the current lack of EUR liquidity, you enter into a swap agreement according to which you buy EUR today, at the current market exchange rate, and you simultaneously sell the same amount of EUR in a month, at a forward rate which is agreed on and fixed on the day of entering into the swap agreement.

You have thus exchanged (swapped) the currency you currently have (RSD) for the currency you lack (EUR), solving the temporary shortage of EUR liquidity while neutralising FX risk.

If you had permanently bought EUR and waited to sell the expected EUR inflow, you would be exposed to the uncertainty of exchange rate fluctuation.

One of the examples of using an FX swap is the situation where you have an RSD surplus but there is a concern that RSD may depreciate due to which you decide to exchange (swap) RSD for EUR, which you invest in government securities in order to gain certain profit and after the expiry of the investment and swap at the previously agreed and fixed exchange rate, you sell EUR and re-purchase RSD you need for the settlement of RSD liabilities.

Risks associated with this financial instrument

The opportunity to enjoy the benefits of a falling exchange rate in the event of FX purchase or the benefits of a rising exchange rate in the event of FX sale is limited.

Change of a market exchange rate may lead to a decrease in the market value of the purchased financial instrument.

A sale of the purchased financial instrument may lead to additional costs, depending on the situation in the market.

If you are interested in the product or if you need additional information, please contact us or send us an inquiry

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