|
Aspects |
Foreign
Exchange Forwards |
Foreign Exchange
Swaps |
|
Definition |
Agreements to buy
and sell a currency at a future date at a predetermined exchange rate. |
Simultaneous
purchase and sale of a currency for two different dates. |
|
Contract Maturity |
Typically, has a
fixed maturity date in future |
Involves two
transactions, a spot transaction and a reverse transaction, with different
value dates. |
|
Purpose |
Used for hedging or
speculation on future currency movements |
Primarily used for
managing exposure to currency risk over a specific period. |
|
Flexibility |
Less flexible since
the terms are agreed upon and locked in advance. |
Offers more
flexibility as it involves both a spot and forward transaction. |
|
Market Standardization |
Can be customized
between parties based on specific requirements. |
May have
standardized terms, especially in the interbank market. |
|
Settlement |
Settlement occurs
at the maturity date and physical delivery of the currencies may take place |
Involves a spot
transaction followed by a forward transaction, settling on different value
dates. |
|
Cash Flows |
Typically, no
upfront cash flow at the initiation of the contract |
Involves an upfront
exchange of currencies at the initiation of the swap |
|
Interest rate differential |
The forward rate in
influenced by the interest rate differential between the two currencies. |
Reflects both the
interest rate differential and the forward points, capturing the cost of
carry for the currencies. |