# FX Swaps and Currency Swaps > An FX swap exchanges currencies now and reverses later; a cross currency swap exchanges interest payments for years. Learn both, their pricing and their uses. Source: https://learn.tradelabsai.com/forex/fx-swaps-and-currency-swaps/ Track: Forex · Level: Advanced · Updated: 2026-10-03 Publisher: TradeLabs AI (https://tradelabsai.com). Education, not financial advice. Cite as: TradeLabs Learn, "FX Swaps and Currency Swaps", https://learn.tradelabsai.com/forex/fx-swaps-and-currency-swaps/ Two different products share the word "swap" in currency markets. An FX swap combines a spot exchange of currencies with a forward exchange in the opposite direction, usually over days to months. It is the most traded instrument in the entire foreign exchange market, used for short term funding and hedging. A cross currency swap (often called a currency swap) is a longer term contract in which two parties exchange principal and periodic interest payments in two currencies, often over several years. Both are central to how global banks and companies fund themselves. ## FX swaps An FX swap has two legs: 1. **Near leg:** exchange currencies today (or on the spot date) at the spot rate. 2. **Far leg:** reverse the exchange on a future date at the forward rate. The difference between the two rates, the forward points, reflects the interest rate difference between the currencies. See [FX Forwards and Forward Points](https://learn.tradelabsai.com/forex/fx-forwards-and-forward-points/). **Example: A 3 month FX swap for funding** A European bank needs $100 million for three months and has euros. Spot EUR/USD is 1.0850 and the 3 month forward is 1.0905 (55 forward points). - **Near leg:** the bank sells €92.17 million and receives $100 million at 1.0850. - **Far leg:** in three months, the bank pays back $100 million and receives €91.70 million at 1.0905. The bank has effectively borrowed dollars against euros. The forward points set the implied cost of dollar funding relative to euro rates. According to the BIS 2022 survey, FX swaps made up about half of global FX turnover, around $3.8 trillion a day. They are used to: - **Fund in a foreign currency** without currency risk. - **Roll forward hedges** and positions. Retail rollover uses short tom next swaps. See [Rollover and Swap in Forex](https://learn.tradelabsai.com/forex/rollover-and-swap-in-forex/). - **Manage liquidity** across currencies. ## Cross currency swaps A cross currency swap typically involves: 1. **Initial exchange** of principal at the spot rate. 2. **Periodic interest payments** in each currency, fixed or floating, for the life of the swap. 3. **Final re exchange** of principal at the original rate. **Example: A company funds itself in euros** A US company wants to finance a European factory with euros but can borrow more cheaply in dollars. It issues a 5 year $108.5 million bond and enters a cross currency swap: it pays $108.5 million to the bank and receives €100 million today; for five years it pays euro interest and receives dollar interest from the bank, which covers its bond coupons; at maturity, it returns €100 million and receives $108.5 million to repay the bond. The company has turned dollar debt into euro debt, matching its euro income. ## Pricing and the basis In theory, the interest rates exchanged should make the swap fair under covered interest parity. In practice, there is a spread added to one leg, the cross currency basis, reflecting supply and demand for funding in each currency. Since the 2008 crisis, this basis has often been negative for many currencies against the dollar, meaning borrowers pay extra to obtain dollars through swaps. See [Cross-Currency Basis](https://learn.tradelabsai.com/forex/cross-currency-basis/). ## Central bank swap lines Central banks use currency swaps with each other. During the 2008 crisis and in March 2020, the Federal Reserve provided dollars to other central banks, such as the ECB, Bank of Japan and Bank of England, through swap lines, easing global dollar funding stress. See [The Federal Reserve and the FOMC](https://learn.tradelabsai.com/macro/the-federal-reserve-and-the-fomc/). ## FX swap vs cross currency swap | | FX swap | Cross currency swap | |---|---|---| | Typical tenor | Overnight to 1 year | 1 to 30 years | | Interest payments | Implicit in forward points | Explicit, periodic | | Principal exchange | At start and end | At start and end (usually) | | Main users | Banks, funds, retail rollover | Corporations, banks, issuers | ## Risks - **Counterparty risk:** large principal exchanges create big exposures. See [Market, Credit and Counterparty Risk](https://learn.tradelabsai.com/portfolio/counterparty-risk/). - **Rollover risk:** short term FX swap funding may become expensive or unavailable in a crisis. - **Basis risk:** changes in the cross currency basis affect valuations. ## Frequently asked questions ### What is an FX swap? A combination of a spot currency exchange and a forward exchange in the opposite direction, used for short term funding and hedging. ### What is a cross currency swap? A longer term contract in which two parties exchange principal and interest payments in two different currencies. ### Why are FX swaps the most traded FX instrument? Because banks, funds and companies use them every day to fund in foreign currencies, roll hedges and manage liquidity. Next, learn how currency options work in [FX Options](https://learn.tradelabsai.com/forex/fx-options/). ## Continue learning - Next lesson: [FX Options](https://learn.tradelabsai.com/forex/fx-options/) - Previous lesson: [Non-Deliverable Forwards (NDFs)](https://learn.tradelabsai.com/forex/non-deliverable-forwards/) - Related: [Non-Deliverable Forwards (NDFs)](https://learn.tradelabsai.com/forex/non-deliverable-forwards/): Non deliverable forwards are cash settled currency forwards for restricted currencies like the Indian rupee. Learn how NDFs work, fixing rates, uses and risks. - Related: [FX Forwards and Forward Points](https://learn.tradelabsai.com/forex/fx-forwards-and-forward-points/): An FX forward fixes an exchange rate for a future date. Learn how forward rates and forward points are calculated from interest rates, with examples and uses. - Related: [Cross-Currency Basis](https://learn.tradelabsai.com/forex/cross-currency-basis/): The cross currency basis measures deviations from covered interest parity. Learn why it exists, why it is often negative and what it says about dollar funding. - Related: [Rollover and Swap in Forex](https://learn.tradelabsai.com/forex/rollover-and-swap-in-forex/): Holding a forex position overnight earns or pays interest called rollover or swap. Learn how it is calculated, triple Wednesday, swap free accounts and carry. - Related: [Interest Rate Swaps](https://learn.tradelabsai.com/bonds-credit/interest-rate-swaps/): An interest rate swap exchanges fixed interest payments for floating ones on a notional amount. Learn how swaps work, SOFR, swap rates, valuation, uses and risks. - Related: [Swaps Explained](https://learn.tradelabsai.com/bonds-credit/swaps-explained/): A swap exchanges one stream of cash flows for another. Learn the main types, from interest rate and currency swaps to credit, total return and commodity swaps.