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Buy and Re-sell

An exporter faced with delays in payment has the option to roll over i.e. extend the Forward FX contract and so avoid the need to close out. The process is similar to closing out an FX contract, but with a major difference.
 

The exporter buys the overdue currency at the Spot Rate to fulfil the original Forward FX contract but sells it forward again simultaneously to the new expected date for the delayed receivables.
 

This procedure is effective but cumbersome. It also involves paying two Spreads - one between the buying and selling Spot Rate for the original deal, and one for the rollover deal.
 

There is an alternative and cheaper method for closing out a Forward FX Contract making use of a Swap procedure.
 

Swaps

'A swap is an agreement to purchase/sell one currency for a second, for one value date (usually Spot) and sell/purchase the first currency for the second for a different value date.
 

With short-dated foreign exchange swaps (typically available for the same period as the equivalent forward market), the exchange rates used for the two value dates reflect the spot (or forward) rate at the start of the swap period and the forward rate at the end of the swap period.
 

For longer-dated swaps, usually transactions made under ISDA (International Swaps and Derivatives Association) documentation, the exchange rate used for the two value dates is usually the same and the parties will make a series of compensatory semi-annual or annual payments reflecting the interest differential inherent in the swap.'