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Swaps

In simple terms, a swap is when two entities trade currency on one date and then agree to trade it back again on a specific date. In more technical terms, a swap is a combination of a spot trade and a forward.

A swap is usually used by investors who need to generate liquidity in a currency. For example, if a trader with dollars needs pounds sterling, he can swap for them. The spot transaction provides pounds, and the agreement to buy back dollars in the future gives the buyer the use of pounds until then. This is a good alternative to simply borrowing a foreign currency.


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