Swap (Swap) Swap Overview A cashbackforex contract 100%cashbackforex an agreement that provides for the forexcashbackeasy of a series of cash flows between two parties to a contract for a certa cashback forex period of time, the exchange occurs on a date pre-determined by the contract, usually only the net cash flow is exchanged (e.g. Plainvanillaswap) A foreign exchange swap is an agreement to buy spot foreign exchange while selling forward foreign exchange in the same currency in the foreign exchange market, or Sell spot foreign exchange while buying forward foreign exchange in the same currency, that is, in the same transaction will be a spot forex cashback easy a forward business together to do, or in a business will be borrowing and lending business together to do When commercial banks in Western countries conduct commercial transactions between them, rarely use forward contracts and use the swap agreement approach For example, the United States Chase Manhattan Bank now needs pounds It can reach a swap agreement with the British Barclays Bank, first in Chase Manhattan Bank based on the spot cashbackforexpip to pay the dollar to Barclays Bank, Barclays Bank to pay the pound to Chase Manhattan Bank, three months later the transaction reversed, Chase Bank according to the contract at the time of the forward rate and then pay the pound to Barclays Bank, from which to recover the dollar Let the spot rate of pound sterling is ￡ 1 = $ 1.7634, the 3-month forward pound rate is ￡ 1 = $ 1.7634. 3 months forward pound exchange rate of ￡ 1 = $ 1.7415, pound discount for $ 0.0219 in the swap transaction, the spot rate and the difference between the forward rate, that is, the uplift or discount is called the swap rate can be seen here, the swap rate is not the exchange rate, only the difference When the uplift or discount as a swap rate, is quoted in the form of basic points in foreign exchange trading quotes, the basic point refers to the fourth decimal point below the is the smallest unit of the offer 1 basic point is, that is, 0.0001 according to the above figures, the pound discount $ 0.0219, into the swap rate is formed 219 basic points swap traders are concerned about the spot exchange rate and the forward exchange rate, that is, the size of the basic points because only the size of the uplift or discount side to decide whether the bank to carry out swap transactions when the bank to buy spot foreign exchange and sell the same kind of national currency If the currency is discounted, it has to pay a certain cost, if the discount is too large it should consider whether to do this transaction because the bank needs a certain foreign exchange, it may not do swap transactions and use the direct borrowing route borrowing to pay interest Therefore, when the bank between borrowing and swap to choose, it will borrow the interest rate and the annual rate of the swap rate for comparison swap rate Based on the above figures, the annual swap rate for this swap transaction is: If the interest rate on the borrowing is 5% or more, Chase Manhattan Bank can engage in the swap transaction, if the interest rate on the borrowing is below 4.97%, Chase Manhattan Bank can not do the swap transaction, the cost of direct borrowing is smaller From here, it can be seen that the essence of the swap transaction is still to hedge the value for the British For Barclays Bank, the essence of the swap transaction is to engage in soft currency speculation. If the loan interest rate is higher than 4.97%, it will not engage in this swap transaction and direct loans, if the loan interest rate is lower than 4.97%, it can engage in this swap transaction In the U.S. commercial banks in foreign exchange transactions, about 65% for spot foreign exchange transactions, 30% for swap foreign exchange transactions, 5% for forward foreign exchange transactions, it can be seen that swap transactions in foreign exchange transactions occupy a considerable proportion of the function of swaps 1, the economic function of swaps Swap transactions The basic economic function is reflected in two aspects of a swap can be used to hedge interest rate or exchange rate risk, for example (interest rate swap as an example): when interest rates are expected to fall, the debt in the form of fixed interest rates, for floating interest rates, when interest rates fall, the cost of debt is reduced; when interest rates are expected to rise, the reverse operation when interest rates are expected to fall, the assets of floating interest rates are converted to fixed rate assets; when interest rates are expected to When interest rates are expected to rise, the reverse operation is performed Second, swaps are used to manage assets and liabilities flexibly (mainly in interest rate swap transactions), e.g., both parties involved in interest rate swaps can convert fixed rates to floating rates or floating rates to fixed rates to match their interest rate sensitive assets and liabilities With the development of swap transactions, their functions have been gradually expanded in four ways First, the price formed by the swap First, the prices formed by swaps reflect all available information and the expectations of different traders, enabling the discovery of future asset prices Second, using swaps, funders can raise funds in markets they are familiar with or in markets that are relatively favorable to them, reducing funding costs Third, because of the strong flexibility of swaps, investment bankers can use swaps to create a range of products Fourth, some professional traders can use their professional Fourth, some professional traders can use their professional advantages to make correct forecasts of interest rates and exchange rates, and use swaps for speculation 2. The main reason for the creation of swaps, as an important financial derivative product, is to hedge financial risks, but in the process of development, there are many risks in swaps themselves. For the main participants of swaps, intermediaries and end-users, the manifestation of risk is different For intermediaries, the first risk they face is credit risk, if one user of the swap defaults, the contract between the other party of the swap and the intermediary is still valid, and the intermediary needs to perform; secondly, when the intermediary is a market maker and it holds a position that does not correspond, it also faces market risk Therefore, the Credit risk and market risk are the main risks for swap intermediaries Other risks, such as country risk, legal risk, settlement risk, etc., also have an impact on intermediaries For end-users, in a swap transaction involving an intermediary, if another end-user defaults, the contract between this end-user and the intermediary is still valid Therefore, as an end-user, you can ignore credit risk and consider market risk as the main risk that needs to be An overview of swaps is a form of transaction in which two parties agree to exchange an asset with each other at a certain time in the future. More precisely, a swap is a transaction in which the parties agree to exchange cash flows that they consider to be of equal economic value for a certain period in the future. In 1982, Deutsche Bank entered into an interest rate swap transaction Deutsche Bank made a long-term floating rate loan to a company. At the time, Deutsche Bank needed to raise long-term capital for a long-term loan and judged that interest rates would rise and that it might be more advantageous to raise long-term capital in the form of fixed-rate bonds. This transaction is considered to be the first formal interest rate swap transaction. Against the background of the trend of integration of international financial markets, swap transactions, as a flexible and effective derivative instrument for hedging and integrated asset and liability management, are gaining more and more attention from the international financial community, and their use is becoming increasingly widespread, with the volume of transactions increasing rapidly. Due to the complex content of swap contracts, most of them take the form of direct one-to-one transactions between the two parties, lacking an active secondary market and the openness of the transactions, with greater credit risk and market risk, therefore, most of the swap traders are strong international financial institutions with strong risk control capabilities, and the swap market is basically the interbank market. The BIS and the International Swap Dealers Association (ISDA), an interbank self-regulatory organization for swap dealers, have developed a series of guidelines and guidelines to regulate swap transactions in recent years, and their risk management is receiving increasing attention from traders and regulators. The swap transaction is different from the spot and forward transactions mentioned earlier. The spot and forward transactions are single, either doing spot transactions or forward transactions, and are not carried out simultaneously, therefore, it is usually also called a single foreign exchange trading, mainly used in foreign exchange transactions between banks and customers. The purpose of swaps includes two aspects, one is to flatten the foreign exchange position, to avoid the risk caused by changes in the exchange rate; the second is to use the difference between the exchange rate of different delivery periods, through the cheap buy expensive sell, profit making types of swaps 1. spot to forward swaps (spot- forwardswaps) spot to forward swaps forwardswaps) spot to forward swaps, refers to buy or sell a spot foreign exchange at the same time, sell or buy the same currency forward foreign exchange it is the most common form of swaps This form of transaction according to the participants can be divided into two kinds: ① pure swaps, refers to the transaction involves only two parties, that is, all foreign exchange sales and purchases occur in the bank and another bank or company customers The purpose of such transactions is to avoid risks and profit from exchange rate changes. For example, a U.S. bank sells a foreign currency to a customer at the rate of US$1 = DM1.68 on a certain day. In order to prevent future appreciation of the mark or depreciation of the dollar, the bank uses swaps to sell spot marks and buy 3-month forward marks at the exchange rate of US$1 = DMl.78. In this way, although the spot marks are sold, the forward marks are replenished, so that the banks mark and dollar position structure remains unchanged. Although in this forward sale the bank to lose a number of marks discount, but this loss can be compensated from the higher dollar interest rates and the difference between the purchase and sale of this spot exchange transactions In swap transactions, the factors that determine the size and nature of the transaction is the swap rate or exchange rate (swaprateorswappoint) the rate is the exchange rate swap rate itself is not the exchange rate applicable to the foreign exchange, but the spot rate and the forward rate. But the spot rate and forward rate or forward rate and the difference between the spot rate, that is, the forward discount or lift swap rate and swap transactions are: if the forward lift (discount) value is too large, the swap transaction will not occur because the cost of the transaction is often greater than the benefits that the exchange can get swap rate has a buy swap rate and sell swap rate 2. one day swap transactions (one-dayswaps ) One-day swaps can be divided into today swap tomorrow (today / tomorrow), tomorrow swap the next day (tomorrow / next) and spot swap the next day (spot / next) today swap tomorrow swap the first due date in today, the second swap day in tomorrow tomorrow tomorrow swap the first due date in tomorrow, the second due date in the day after spot swap the next day swap The first due date in the spot foreign exchange trading starting date (i.e. the day after), the second due date is a day in the future (such as spot swap 1 month forward, forward due date is the 30th day after the spot delivery date) 3. forward to forward swaps (forward-forwardswaps) forward to forward swaps, refers to the purchase and sale of two different delivery periods of the same currency forward Foreign exchange the transaction has two ways, one is to buy the shorter delivery period of the forward foreign exchange (such as 30 days), sell the longer delivery period of the forward foreign exchange (such as 90 days); two is to buy the longer term forward foreign exchange, and sell the shorter term forward foreign exchange If a trader sells 1 million 30-day forward dollars at the same time, and buy 1 million 90-day forward dollars, this trading method that forward-to-forward Swap transactions because this form allows banks to take advantage of more favorable exchange rates in a timely manner, and profit from changes in the exchange rate, so it is increasingly valued and used For example, a U.S. bank should pay out ￡1 million in three months, while in one month will receive another ￡1 million of income If the market exchange rate is favorable, it can carry out a forward-to-forward swap transactions Let a day Foreign exchange market exchange rate: spot rate: ￡ l = US$ 1.5960 / 1.5970 1 month forward rate: ￡ 1 = US$ 1.5868 / 1.5880 3 months forward rate: ￡ 1 = US$ 1.5729 / 1.5742 At this time the bank can make the following two swap transactions: (1) two "spot to forward "swap transaction is to pay the pounds three months later, first buy in the forward market (3 months, the exchange rate of 1.5742 U.S. dollars), and then sell it in the spot market (the exchange rate of 1.5960 U.S. dollars) so that each pound can benefit from 0.0218 U.S. dollars at the same time, the pounds to be received a month later, first sold in the forward market (the term of 1 month, the exchange rate of 1.5.060 U.S. dollars). 1 month, the exchange rate of 1.5868 U.S. dollars), and buy in the spot market (the exchange rate of 1.5970 U.S. dollars) so that each pound must be posted 0.0102 U.S. dollars two transactions together, each pound can gain 0.0116 U.S. dollars (2) direct forward to forward swap transactions that buy 3-month forward pounds (the exchange rate of 1.5742 U.S. dollars), and then sell a month of forward British pounds (exchange rate of 1.5868 U.S. dollars), each pound can get a net gain of 0.0126 U.S. dollars can be seen, this transaction is more favorable than the previous transaction the role of swap transactions As the swap transaction is the use of different delivery periods to carry out, you can avoid the risk of exchange rate changes caused by time is not one, international trade and international investment has played a positive role in specific performance; 1. For example, a British exporter signs a contract with a U.S. importer that provides for payment in U.S. dollars after 4 months It means that the British exporter will receive a sum of spot U.S. dollars after 4 months During this period, if the U.S. dollar exchange rate falls, the exporter has to bear the risk In order to make this loan hedge, the exporter can sell an equivalent amount of 4-month forward U.S. dollars immediately after the transaction to ensure that after 4 months the In addition to exporters and importers, multinational corporations often use hedging to keep the domestic value of foreign currency assets and bonds on the companys balance sheet intact. The swap transaction can also obtain the benefits of hedging, but in operation, the swap transaction is still different from the hedge, that is, in the hedge, the time and amount of the two transactions can be different 2. Banks and other financial institutions use this new investment tool to make short-term foreign investments. In making such short-term foreign investments, they must convert the local currency into the currency of another country and then transfer it to the investment country or region, but when the funds are recovered, there is a possibility that the foreign currency exchange rate will fall, causing the investor to suffer losses. For example, after a bank buys a customers 6-month forward USD 1 million, in order to avoid the risk and flatten the position, it must then sell the same amount and the same delivery date of the forward But in the interbank market, the direct sale of separate forward foreign exchange is more difficult therefore, the bank adopts such a practice: first in the spot market to sell 1 million spot dollars, and then do a swap sale of the opposite, that is, buy 1 million spot dollars, and sell 1 million forward dollars, the term is also 6 months results, spot dollars a buy and sell offset each other, the bank actually sold only A 6-month forward dollar, rolling out the similarity between the dollar overbought swap contract and the forward contract that emerged from the transaction with the customer