A foreign exchange swap is a swap agreement between two counterparties to exchange one FX currency for another over a specified period of time. Savings swap agreements are also over-the-counter products and are similar to the interest rate swaps described above. The main difference between a foreign exchange swap and an interest rate swap is that the currency swap involves the exchange of net worth, while the interest rate swap only involves the exchange of the difference in interest payments. Suppose Citibank wants books for three months and is working on a swap with Lloyds. Citibank will negotiate dollars with Lloyds and receive books in return. In three months, the trade will return. Citibank will pay pounds to Lloyds and receive dollars (of course, there is nothing special within the three-month time limit used here – swaps could be for any period). Suppose the spot price is $2.00 and the 3-month rate is $2.10, which gives a premium of $0.10 on the pound. These premiums or discounts are actually shown in basis points when they serve as swap rates (one basis point is 1/100 per cent or 0.0001). Thus, the $0.10 premium will be converted into a swap rate of 1,000 points, which is all that interests the swap participants; they do not care about the actual spot or futures price, because only the difference between them is important for a swap. Currency swaps were originally designed in the 1970s to circumvent exchange controls in the United Kingdom. At the time, British companies had to pay a premium to borrow in U.S. dollars.
To avoid this, British companies enter into back-to-back loan agreements with US companies that want to borrow Sterling.  Although such restrictions on currency change have become rare, comparative advantages continue to save back-to-back loans. Figure 5-12 shows a once currency swea. The nominal amount in USD is $1 million. The current usd/EUR exchange rate is .95. The agreed spread is 6 bp. The initial 3-month libor courses are Barrow Co Bank can arrange a currency swea with Greening Co. The swap would be immediate and in five years for the main amount of EUR 500 million with an exchange of capital, both exchanges being at the current spot price.
The following reading illustrates some of the recent problems with cursive exchange contracts. A foreign exchange swap involves the exchange of capital and interest payments in one currency for interest and capital payments in another. The floating index, referenced in each currency, is usually the 3-month interbank rate (IBOR) proposed in the corresponding currency. B libor in USD, GBP, EURIBOR in EUR or STIBOR in SEK.