Japan Yen

Forex: Swap Transaction How it works?

Suppose a U.S. company needs 15 million Japanese yen for a three-month investment in Japan.

* It may agree to a rate of 150 yen to a dollar and swap $100,000 with a company willing to swap 15 million yen for three months
* After three months, the U.S. company returns the 15 million yen to the other company and gets back $100,000, with adjustments made for interest rate differentials

In all of these transactions, market rates might change. However, the buyer and seller are locked into a contract at a fixed price that cannot be affected by any changes in the market rates. These tools allow the market participants to plan more safely, since they know in advance what their FX will cost. It also allows them to avoid an immediate outlay of cash.