DISTINCTION BETWEEN FOREIGN CURRENCY SWAPS & FORWARD CONTRACTS :
1. Swaps involve simultaneous purchase
and sale of equal amount of base
currency which means there is no open
exposure to rate change.
In forward contracts there is an outright
purchase or sale of specific amount of
base currency.
2. Swaps can be viewed as a combination
of spot and forward transactions.
In forward contracts, they represent forward transactions
only.
3. Swaps are available for longer maturity
transactions extending beyond one
year.
Forward markets are normally available
only for transactions having maturity
period of less than one year.
4. The currency swap covers both
principal and interest payment.
In Forward contracts, to cover principal and interest payment
through forward exchange market, a
series of forward contracts of differing
maturities and non standard amounts
would be required to hedge each cash
flow seperately.
5. Currency swaps are used to hedge
liquidity and interest rate risk.
Forwards contracts are used to hedge
exchange rate risk.
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