What Are Swap Meets?

What are Swap Meets?  In currency trading there is a non-traditional but often used tactic to reduce a party’s exposure to changing currency values: currency swaps or Forex swaps.  In currency swaps, regardless of the actual method utilized, the key components and goals are the same: two separate entities looking to protect debt or cash-flow by making agreements with one another to perform swap meets in their own domestic currency.  The benefit to currency swaps is the ability to protect one’s assets or debt from inflating or deflating in value based on currency fluctuations.  In their most basic expression, currency swaps involve one entity making a contract with another entity and exchanging like financial interests such as debt.  If one entity has a loan in a foreign currency such as the Euro, and another European based entity has a debt in US Dollars, they both can negotiate an off-market swap meet to exchange the loans for amounts in their own currency.  In this way they both insulate themselves from ever-changing exchange rates for US Dollar and Euro currency pair.

Swap Meets In The Forex Marketplace

Forex currency swaps first came into use during the 1970’s in Britain.  At the time the British central banks subjected private entities to currency swaps taxes for exchanging debt or cash-flows for domestic currency.  The private entities then did the most natural thing: they looked for similar companies looking to lock in currency rates on their similar debt or cash-flows in non-domestic currencies.  From this taxing came the now commonplace currency swaps in the Forex market.  In the year 2008 during the world economic crunch, currency swaps came into the central spotlight as the US Government looked to maintain liquidity of the US Dollar overseas.  Using currency swaps with other national central banks, these swap meets enabled both the US and the overseas partner to lock in currency exchange rates on existing debt for a future exchange at a set rate.  In this way the US Dollar was able to stay competitive in the world market by setting exchange rates now before any potential shake-ups.

Related posts:

1. The Forex Swap
2. What Is A Rate?
3. What Is Forex?
4. Currency Pair Quotes
5. The FX Trading Process