A currency swap is two transactions in a currency, one of which is a buy and the other a sell, but not necessarily in this sequence. The dates of execution of both parts of the transactions are different, but the amount of currency for which the transaction is performed remains unchanged within the swap.
Currency swap concept
If we describe the concept of "currency swap" in more rigorous terms, then they say that this is a combination of conversion transactions, essentially opposite, with an equivalent amount, but different value dates. They say that the value date is the date when the first transaction was made, and the date of execution or implementation of the swap is the time of the reverse transaction. As a rule, a currency swap transaction is very rarely concluded for a period of more than one year.
There are two types of swap deals. In the first case, currency is first bought and then sold; in the second, vice versa. Thus, a swap of the first kind is called "buy / sell", and a swap of the second kind is called "sell / buy".
In most cases, the swap is carried out with the same counterparty - a foreign bank. This is a "clean" swap. But there is also a "constructed" swap, when the first foreign exchange operation is performed with one counterparty, and the second - with another. The value amount remains unchanged, even with a constructed swap.
Swap transactions serve as an instrument for refinancing or regulating bank liquidity. As a rule, Central Banks, which have a significant flow of funds coming in foreign currency, are more willing to lean towards this instrument. For example, swaps are constantly used by Brazil and Australia.
While currency swaps are, in form, currency conversions, they are, in essence, money market transactions.
Swap line
A swap line is an agreement between central banks of different countries concerning exchange of currencies at fixed rates. For example, one central bank buys from another euro for dollars, and sells already at the cost increased by the swap difference. This method, in fact, allows you to issue funds.
Swap lines were first used during the 2008 credit crisis to stabilize the situation. The swap line agreement has a significant impact on exchange rates. It can be concluded for a fixed period or amount of funds, but it may not have any restrictions.
The Bank of Russia also uses transactions such as currency swaps to provide liquidity to credit institutions or to ensure liquidity of banking institutions, in the event that other funds are insufficient to achieve this goal. The Bank of Russia began to use currency swap operations in the fall of 2002. At first, transactions were carried out on the ruble-dollar instrument; in 2005, the ruble-euro instrument was added.
