Eliminating exposure of the currency

Question

Banks find it essential in order to accommodate their client’s requirements for buying or selling foreign exchange forward, in several instances for the hedging purposes.  How the bank can eliminate the exposure of the currency it has made for itself by accommodating a client’s forward transaction?

Answer 1

Swap transactions provide a way for bank in order to diminish the currency exposure in the forward trade.  A swap transaction is defined as the simultaneous sale (or purchase) of the spot foreign exchange beside the forward purchase (or sale) of about same amount of foreign currency.  For example, suppose a bank customer desires to buy the dollars three months forward beside the British pound sterling.  Bank may handle this trade for its customer and concurrently neutralize the risk of exchange rate within the trade by selling (borrowed) the British pound sterling spot against the dollars. Bank may lend dollars for three months up till they are required to deliver against the dollars which it has sold forward.