Currency swaps lock in the price of a currency pair and is another tool that can be used to manage an organisation’s cash flow. The currency swap pays the fixed-price buyer of a currency pair a payout equal to the difference between the current price and the settlement price of the swap.

Fixed for Float Swap
A (fixed for floating) swap is a financial product which acts as a hedge against an adverse downside movement for an investor or corporate hedger.  The components of a swap are as follows:

  • Reference Index:  A pricing index such as a currency pair future or OTC currency pair
  • Fixed Price is a negotiated price which will be compared to the floating (index) price to determine if the swap is in our out of the money.
  • Floating Price is created from the reference index by averaging the reference prices over the period of the agreed swap.
  • Floating Payment is calculated by multiplying the floating price by the volume of the notional used for the currency pair.

Currency Swaps Calculation: The average floating price over the swap period is compared to the fixed price, to determine which way cash will flow.

Swap Pricing Periods: The periods of time that are agreed upon which incorporate the swap.  When the swap period is complete the floating price is examined, and payments are exchanged. Generally monthly periods are used to compute swaps.