QuoteOriginally posted by: Patient0Thanks RMax,I know that this is how it is *supposed* to work, especially in theory, but I am in a debate with a trader about how it actually works in practise, particularly when it applies to using FXSwaps to hedge other derivatives - so I have to understand the specifics.What's the answer to Question 1? What would be a suitable forward notional?I guess what would probably help me the most would be if someone could point me to an example of a real-life FX Swap confirmation, so I could see what precisely is agreed between the two counterparties (and hence what is left implied by arbitrage considerations).found this to be exceptionally helpfulAlso, this document on page 29 appears to talk about the issue I was talking about.i.e. if you "fix" one leg or the other (e.g. fix to both lend and receive AUD notional) then you end up with a residual FX exposure. (e.g. in the St George document you end up with USD interest that you probably don't have much use for).To make it a perfect hedge for both counterparties, the spot and forward notional amounts have to be "unmatched", otherwise each side ends up with unwanted interest in a currency they don't actually care about.Finally, Section 1.2 of Castagna - Volatility and Smile Risk talks about "par" vs non-par FX swaps. For the non-par case, "the domestic rate must be agreed" which is as I understood it also.There is typically a specific traded amount... ie... let's say the client wants to S/B 100mm USD/JPY for 6 months.Clients will typically confirm the traded amount as well as the points and value date for the far leg of the swap (sometimes for the near leg as well, in the case of a forward forward). The residual in this case, would be a fallout on the Yen side...since the client is trading dollars. Example...client S/B... therefore the trader has to B/S.Near leg... trader Buys 100mm USD/JPY @ 80.00 (using a round number for example purposes).... +8bn JPYFar leg ... trader Sells 100mm USD/JPY @ 81.00 (spot is 80, plus 100 ticks).....(8.1bn) JPYTrader is left with a spot exposure of 8.1bn JPY - 8.0bn JPY = 100mm JPY (trader sells)the dealer can either sit on that spot exposure (100mm JPY)... or... as in most cases, hedge out of it on a separate trade.