FX & Rates
All FX conversions when financial settlement takes place on another banking day (or FX value date) after conclusion of the trade are spot transactions.
The spot transaction amount takes place based on the current interbank FX market and, accordingly, it may change very quickly (even every second). Naturally, the spot rate may differ (and generally does differ) with the official banking rate fixed for the given date since it is only a snapshot of the FX market in the morning.
Apart from the fact that foreign currencies can be sold and bought on the spot FX market (at spot rate), it is possible to conclude forward contracts for a specified future value date.
Theoretically, if the future value date specified in the contract sets in, the forward conversion rates may tally with the current spot rate. However, practice shows that forward rates are almost always higher (premium) or lower (discount) than that.
Premium and discount values are called swap points and these depend on the interest rates of the two foreign currencies, or are the differences thereof. The forward exchange rate is generated based on this when the swap points are added to the spot exchange rate:
Forward rate = spot rate +/- swap points
A swap is an exchange rate transaction which means the spot sales/purchase of a given FX and the simultaneous forward purchase/sales of the same FX amount:
Spot transaction + forward transaction = FX swap transaction
An IRS is an agreement on which the two contracting parties exchange their FX interest payment liabilities throughout a defined period. Under the contract, only the interest rate moves, the principal amounts don’t.
It is possible that one of parties exchange a fixed interest payment liability with a variable interest rate (coupon swap) or that two liabilities with variable interest rates calculated on different basis (e.g. USD prevailing interest rate and LIBOR) form the subject of the contract (basis swap).