What is a Total Return Swap?

Swap transaction (Swap Transaction) refers to the transaction form that the two parties agreed to exchange certain assets with each other in a future period. More precisely, swap transactions are transactions between parties that have agreed to exchange cash flows that they consider to have equivalent economic value within a certain period of time in the future. More common are currency swap transactions and interest rate swap transactions. Currency swap transactions refer to the exchange transactions between two currencies, and in general, the principal exchange of funds in two currencies. Interest rate swap transactions are exchange transactions between different types of interest rates of funds in the same currency, and are generally not accompanied by exchange of principal. Like futures and options trading, swap trading has become an important tool for international financial institutions to avoid exchange rate risk and interest rate risk.

Swap transaction

In 1981, IBM and the World Bank entered into a currency swap transaction between the Swiss franc and the German mark and the US dollar. when

(1) Buying and selling are consciously performed simultaneously

(2) Buy and sell the same currency and the same amount

(3) Different trading delivery deadlines

Swap transactions are different from spot transactions and

Spot-to-forward swap

1. Spot-forward swaps

Spot-to-forward swap transactions refer to those who buy or sell a certain type of spot foreign exchange while selling or buying the same currency

Swap transactions are carried out using different delivery periods, which can avoid the risk of exchange rate changes caused by time differences and play a positive role in international trade and international investment. Specifically in:

Good for importers and exporters

1. Conducive to importers and exporters

1. The quotation bank often only reports swap points, not spot prices.

2. Since both the forward and spot are based on the same spot exchange rate, the spot exchange rate does not affect the quality of swap trading.

3. Select the corresponding swap point.

4. If you sell USD at the spot price of 1.6823, and the forward swap point is 64, the forward base price is 1.6823 instead of the immediate bid price. Therefore, the forward exchange rate is 1.6887.

5. The transaction involves two exchange rates and two value dates.

6. Both parties to the transaction shall report the settlement and income increase instructions for the two currencies in order to conduct two transactions with opposite directions on different value dates.