Foreign exchange swap

(1) A foreign exchange swap involves two foreign exchange transactions, a spot transaction and a forward transaction, both on the same currencies but offsetting each other. (2) The difference between the exchange rate that applied initially and the exchange rate at maturity reflects the interest differential between the two currencies exchanged. (3) In practice, the foreign exchange swap is sometimes confused with the cross-currency swap. A foreign exchange swap does not involve an exchange of interest flows whereas in a cross-currency swap, the initial exchange of principal amounts of two different currencies is accompanied by an exchange of interest and principal payments due over the term of the swap on the principal received initially, calculated in the same currency.