January 1st, 2014, 6:14 am
Hi Jeremy,I'll try to explain FX Swaps quickly:FX Swap is simultaneously buying and selling of fx spot and fx forward. You can do both directions (buy & sell, sell & buy -> fx spot & fx forward respectively).Obviously, you don't execute 2 deals, and dealer will quote you the difference between the spot and forward (actually, it can be 2 forwards, so the diff between leg#1 and leg#2).Exposure wise, this is equivalent to a cross currency irs, where the rates exchanged are both fixed, with one rate set off-market at 0%.The exposures you will get is long dv in one ccy and short dv in the other ccy (supposed to be the respective OIS curves, assuming you have a reasonable CSA in place), plus a long/short ccy1/ccy2 basis exposure - this is also heavily dependent on your institution (a US bank with access to fed funds will have a different discount curve than a EUR bank for example, and thus differenet IR attached to the same ccy).Spot exposure results from NPV calculation, which means (assuming mid-market, i.e. npv=0 at inception) you get some positive npv in ccy1 and the same amt of negative npv in ccy2 (thus netting npv=0). This absolute amt of npv is your spot exposure, and this spot exposure will be different if you're a USD bank or a EUR bank or a TRY bank, because of the different discount curves you will use.FX Swaps are liquid usually upto 1 year (very liquid ccys will be quoted to somewhat longer maturites) and above 1 year cross ccy irs takes over liquidity wise.Hope this made sense.