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FX Swap/Rollover

What is an FX Swap/Rollover?

An FX Swap (or rollover) is an FX strategy that allows the client to roll forward the actual exchange of currencies at the maturity (settlement) of a forward contract. The client pays the existing counterparty the mark to market of their current position and enters into a new forward. It is not to be confused with a cross currency swap, interest rate swap or commodity swap where there is a series of exchanges.

Objective

To allow the maturity date of a forward contract to be pushed forward (or brought back).

How does it work?

For example, a USD-based client intends to sell an asset in Europe in a year’s time and on completion of the sale will need to then sell EUR for USD. The client wishes to protect the current forward rate of 1.0950 and therefore enters into a forward contract at this rate to sell EUR and buy USD. Upon arriving at the maturity date (or, more precisely, two working days before) the client has not sold the asset and therefore has no EUR to sell. The client therefore executes an FX Swap to change the value date of his current position.

The client buys back the EUR which they had agreed to sell under the old forward contract (which is now trading for spot value) at either a profit or a loss and simultaneously sells the EUR forward again to a new forward date by which time the client is sure the sale will have gone through. Effectively, they will pay or receive the mark to market of their current position and enter into a new forward contract for a month’s time when they can be sure that the sale of the asset has gone through.

Advantages
  • Introduces flexibility to hedging using forward contracts
Disadvantages
  • Profits and losses have to be crystallised on rollover. While it is true that, from a P/L perspective, the spot rate on rollover has no effect, since what is lost on the spot leg is made up on the new forward leg, the crystallisation of a loss on the near leg of the rollover will create a funding requirement until the maturity of the far leg.
 
News
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Success stories
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