Can you please help me understand how FX swap is a simultaneous spot and forward transaction?
What I understood is that both legs of the swap are forward transactions, just that the currency that one leg buys, is sold by the other leg. Where is the SPOT transaction here?
Swaps are not single period instruments. You have to roll over into another period of the swap. At that time - you have to transact at the Spot - to buy / sell your original position, and then enter into another forward swap position. So if you bought a leg of a swap today - for 6 months - at the end of six months - you have to sell that leg (at the Spot) and then “roll into” another forward leg.
It might be true that swaps are typically multi period instruments.
However, can’t I intentionally structure a swap on a single period horizon? In such a case, will it still be “a simultaneous spot and forward transaction”?
if it were a single period, it would not be called a SWAP, period. it would then be called a forward or a future or sth like that. the minute it is a swap, it is multi-period, period.
Respectfully, an FX swap isn’t a swap; it’s rolling over a currency forward contract. It’s confusing (read: _ stupid _) nomenclature, but we’re stuck with it.
Suppose that you have a currency forward that is about to expire – you’re long GBP, short AUD – and you want to roll it over. When it expires (well, technically, 2 days before it expires, given a T + 2 settlement), you have to sell GBP for AUD in the spot market to deliver against the expiring contract, and buy GBP for AUD in the forward market to roll over your current forward postion. There you have the two transactions: one in the spot market, one in the forward market.
Super helpful, S2000, as always.
Glad to be of assistance.