SummaryAn FX Swap/Rollover is a strategy that allows the client to roll forward the exchange of currencies at the maturity (settlement) of a Forward contract.
What is an FX swap/rollover?
An FX swap/rollover is a strategy that allows the client to roll forward the exchange of currencies at the maturity (settlement) of a forward contract. The client pays the existing counter party the marked-to-market price of their current position and enters into a new forward.
To allow the maturity date of a forward contract to be moved.
How does it work?
A U.S.-based client intends to sell an asset in Europe in a year’s time and exchange the euro proceeds for dollars. The client enters into a forward contract to sell euros and buy dollars at a set exchange rate in 12 months’ time. At the maturity date, the client has not sold the asset and executes an FX swap to change the expiration date of the forward. The client exits the original forward contract and simultaneously enters into a new contract based on the same underlying asset with an extended maturity and set at the current market price.
- The client benefits from increased flexibility should business circumstances change.
- Any gain or loss on the original contract must be settled, which may create a funding requirement.
Chatham Hedging Advisors, LLC (CHA) is a subsidiary of Chatham Financial Corp. and provides hedge advisory, accounting and execution services related to swap transactions in the United States. CHA is registered with the Commodity Futures Trading Commission (CFTC) as a commodity trading advisor and is a member of the National Futures Association (NFA); however, neither the CFTC nor the NFA have passed upon the merits of participating in any advisory services offered by CHA. For further information, please visit chathamfinancial.com/legal-notices.
Transactions in over-the-counter derivatives (or “swaps”) have significant risks, including, but not limited to, substantial risk of loss. You should consult your own business, legal, tax and accounting advisers with respect to proposed swap transaction and you should refrain from entering into any swap transaction unless you have fully understood the terms and risks of the transaction, including the extent of your potential risk of loss. This material has been prepared by a sales or trading employee or agent of Chatham Hedging Advisors and could be deemed a solicitation for entering into a derivatives transaction. This material is not a research report prepared by Chatham Hedging Advisors. If you are not an experienced user of the derivatives markets, capable of making independent trading decisions, then you should not rely solely on this communication in making trading decisions. All rights reserved.20-0293
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An FX forward is a contractual agreement between the client and the bank, or a non-bank provider, to exchange a pair of currencies at a set rate on a future date.
An FX option is a contract that confers on the holder the right but not the obligation to exchange an amount of one currency for another at a pre-agreed rate (strike rate) on or before a pre-agreed date.
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