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Glossary
Swap
Definition
An order to spot trade (for example, buy) a forex instrument as well as to conduct the opposite transaction (for example, sell) for a fixed price at a later date.
If the first transaction is for a future date, the transaction is a forward-forward contract. Other variations are overnight and tomorrow/next day (tom/next) swaps.
What is a swap?
A swap is a financial derivative contract where two parties agree to exchange financial instruments or cash flows for a certain period. The most common types include interest rate swaps, currency swaps, and commodity swaps. These contracts are typically used for hedging risk or speculating.
Why are swaps important to consider when trading?
Swaps are important in trading as they offer a way to manage risk, particularly interest rate and currency risks. By exchanging cash flows, companies can hedge against fluctuations in interest rates or exchange rates, stabilising their financial operations. For traders, swaps can be a tool for speculation, allowing them to profit from changes in market conditions. However, swaps are complex instruments and require a good understanding of the underlying risks.