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Continue from my last post Swaps try to understand the types of swaps :

  1. Swap in transaction: In such transaction the base currency is bought for near delivery & sold for forward delivery
  2. Swap out transactions : In such transaction the base currency is sold for near delivery & bought for forward delivery.
  3. Forward Swaps: In such transactions both the purchase and Sell transactions take place for future deliveries.
  4.  Rollover swaps : In such transactions the 2 components of transactions are mainly done for the last & 1st working days of the calendar month. This enables traders to square excess exposure in their forward maturities.

Various Uses of Swaps :

  1. Since a foreign currency swaps involves an actual exchange of principal & since both purchase and sale aspects are defined at the same time , the transactions become free of all exchange risk. It’s therefore possible to adjust liquidity mismatches without incurring risk.
  2. Since swaps points represents interest rates differential they help to protect interest rate risks.
  3. International investor use this mechanism to create funds in any desired currency for investments without danger of currency depreciation.( FII actively use this mechanism to create INR for local investment without exchange rate risk)
  4. Commercial banks are required to maintain minimum balances in Nastro a/c and also fund a/c periodically due to unexpected  debits.In both such situation banks prefer to provide liquidity in there account. through swap transactions rather than by outright purchase of currencies which results in blockage of funds without any return
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