A Foreign Exchange (FX) Swap is a short-term arrangement where a company or institution swaps domestic currency for another, then swaps it back after a short time - this may involve the use of a Forward contract.
If a company sells something internationally, and they now hold a significant amount of foreign currency, they may want to exchange it for their domestic currency. If, however, they already have a payment obligation in the foreign currency within the next few months, they may use an FX Swap arrangement.
They would swap the foreign currency for their own, and have agreed upon terms for swapping back to the foreign currency when they need it. This will give them liquidity in their own currency in the meantime.
When they swap it back for the foreign currency, they may use a rate set in advance with a Forward contract. FX Swaps are the most actively traded Foreign Exchange instruments.
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