A currency swap is a foreign exchange agreement between two parties to exchange a given amount of one currency for another and, after a specified period of time, to give back the original amounts swapped.
Currency swaps can be negotiated for a variety of maturities up to at least 10 years. Unlike a back-to-back loan, a currency swap is not considered to be a loan by United States accounting laws and thus it is not reflected on a company's balance sheet. A swap is considered to be a foreign exchange transaction (short leg) plus an obligation to close the swap (far leg) being a forward contract.
Currency swaps are often combined with interest rate swaps. For example, one company would seek to swap a cash flow for their fixed rate debt denominated in US dollars for a floating-rate debt denominated in Euro. This is especially common in Europe where companies "shop" for the cheapest debt regardless of its denomination and then seek to exchange it for the debt in desired currency.
Overnight index swap
Overnight index swap is an interest rate swap involving the overnight rate being exchanged for some fixed interest rate. Generally short-term, the interest of the overnight rate portion of the swap is compounded and paid at maturity.
An overnight indexed swap (OIS) is a fixed/floating interest rate swap with the floating leg tied to a published index of a daily overnight rate reference. The term ranges from one week to two years (sometimes more). The two parties agree to exchange at maturity, on the agreed notional amount, the difference between interest accrued at the agreed fixed rate and interest accrued through geometric averaging of the floating index rate.
This means that the floating rate calculation replicates the accrual on an amount rolled “P plus I” at the index rate every business day over the term of the swap. If cash can be borrowed by the swap receiver on the same maturity as the swap and at the same rate and lent back every day in the market at the index rate, the cash payoff at maturity will exactly match the swap payout: the OIS acts as a perfect hedge for a cash instrument. Since indices are generally constructed on the basis of the average of actual transactions, the index is generally achievable by borrowers and lenders. Economically, receiving the fixed rate in an OIS is like lending cash. Paying the fixed rate in an OIS is like borrowing cash. Settlement occurs net on the earliest practical date. There is no exchange of principal.
Use
The OIS swap can be used to manage interest rate risk for flexible periods, without taking liquidity risk and with minimum credit risk (hence there is efficient usage of capital). This will lead to deeper and more efficient markets.
Since their introduction in the 1990s, Overnight Indexed Swaps have become a widely-used, highly credit-efficient and liquid derivative in all major currencies. They are used to hedge against, or speculate on, moves in overnight interest rates (both ‘micro’ moves — daily volatility — and, more importantly, ‘macro’ moves driven by central banks, who influence overnight rates directly.
Interest Rate Risk Management
OIS allow the interest rate risk profile of a portfolio to be changed as if by the addition of a cash asset or borrowing but with no use of cash and with minimal use of credit. These features allow much better risk management and separate funding maturity from interest rate duration.
Forex swap
Forex swap is an over the counter short term interest rate derivative instrument. A Forex swap consists of a spot foreign exchange transaction entered into at exactly the same time and for the same quantity as a forward foreign exchange transaction. The forward portion is the reverse of the spot transaction, where the spot purchase is offset by a forward selling. In this way, temporary surplus funds in one currency are for a while swapped into another currency for better use of liquidity. Protects against adverse movements in the forex rate, but favourable moves are renounced.
The fixed rate in this transaction is the forward rate that is locked in by the forward contract. The floating rate will be the overnight rate that is realized on a daily basis by the spot transaction. Typically, the floating side of these trades are indexed to the Overnight Index Swap (OIS) rate. This rate is an average of the rates that are paid based on a survey.
It should not be confused with a currency swap, which is a much rarer, long term transaction, governed by a slightly different set of rules.
In emerging money markets, Forex swaps are usually the first derivative instrument to be traded, ahead of Forward rate agreements.
TRADING RESULTS at GBPJPY
When we backtested at the highest possible level, using GBPJPY (British Pounds/Japanese Yen) on the Daily Chart, at the highest modelling quality available:
10k over the last year became $35,236 (see below)
10k over the last 3 years became $223,643!
*This equates at around 10% a month, the growth of which is compounded.
THIS DOES NOT EVEN INCLUDE THE SWAP!!!! Adding the swap in you can add approximately 25% of the results - with compounding this will create a multiplier effect so results will be considerably higher than stated. The compounding effect of additional equity and larger lots size will in actuality lead to results several times larger than those here stated. So, 10k over 7 years will net you a much more than $5.2 million once the swap is calculated in!
The most important point to consider is that our EA performs very well, without taking the risks that many other EA's are designed to take. Wouldn't you rather have a program that works on all market trends, rather than potentially failing when you least expect it? Another rather important point is that I use and have been using my EA for my own trades and have done quite well!
The system is primarily designed to run on GBPJPY, as it has the highest swap level of all the majors. Similiar results are also obtainable on (and not limited to) GBPCHF. You can run this EA on as many pairs and timeframes as you like, but high chart timeframes (Daily) are always used to determine the trend. To become confident with our software, you first need to do some testing on your end, until you are comfortable enough to begin real trades. If you do not have MetaTrader4 (MT4) platform installed, you will need to download it from one of the brokers that support MT4 (we provide you with a list).
