FX-swap market

Like a Repo transaction except the collateral is a foreign currency. These transactions allow players to operate in foreign currencies and hedge out exchange risk. Each side of the transaction will pay corresponding interest on the currency they will hold. On top of that, which every currency is in more demand, the receiving party will pay a “basis” which is the interest premium on top of the standard interest (LIBOR or Euribor). The basis is a good way to determine global demand for dollars1.


References

1.
Wang, J. J. Central Banking 101. (Joseph, 2021).

Links to this note