A currency swap is a combination of a spot currency trade and a forward contract. This type of contract is also very complicated and involves multinationals trying to get better rates in their trading activities.
For example, a car manufacturer in the USA makes a deal in Europe but believes it will get better interest rates in the USA because of better relationships in the USA. The manufacturer borrows funds in the USA over the next 5 years.
The USA manufacturer then makes a deal with European banks to trade it’s future dollar interest rate liability to the USA banks in Euros. As such the European bank agrees to pay the car manufacturer enough dollars to service it’s dollar loan and in return, the car manufacturer agrees to make payments to the European bank in Euros.
4. The Currency Futures
Currency futures fall under forward currency contracts. They however have specific contract sizes ,maturity dates and are traded in a formal exchange. Most currency futures are traded in the Chicago Mercantile Exchange.
Retail currency traders can trade in the currency futures market however they are more expensive to trade than spot forex in that one needs to trade through a member of the exchange. Another disadvantage is that unlike the spot market where the trader only risks the capital available with his forex broker, trading in currency futures puts at risk all the wealth a trader may have.
Spot forex traders have been known to look at currency futures rates as a guide to the trend in a currency.
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