Swap transaction

A bilateral transaction, combining a spot transaction and a forward transaction - in opposite directions. For example: You sell to the bank US Dollars for Australian Dollars (spot transaction). Concurrently, you agree with the bank an opposite transaction to be made at a future date, future amount and at a rate agreed in advance: You will sell to the bank Australian Dollars for US Dollars (forward transaction). A swap transaction is made when you wish to enter into a financial investment for a limited term, without being exposed to exchange rate risk. The transaction is used to hedge risk arising from change in rates of the currencies involved in the transaction, but also includes exposure to the risk that the counter-party to the transaction would not make the payment for the reverse conversion upon the future transaction date.