Swaps
a swap is a spot sale of a currency, combined with a forward repurchase. You combine these two activities into one, so that the transaction cost is reduced. Instead of paying for two separate transactions, you just pay for one. As a result of the cost savings (lowered broker fees), foreign exchange swaps now make up a large portion of all FX trading.
example of a FX swap: a company received money from customers in the US, and has to pay suppliers in the US in 3 months. They may decide to invest short term in EuroBonds. A three month swap of dollars into Euros is a cost effective way to do so. Otherwise, the company would need two separate transactions - (a) sell dollars for spot Euros, and then also (b) sell those Euros for dollars on the forward market. By instead doing the "swap", the company is able to reduce the steps to just one.
More links
foreign currency trading
spot exchange rate
forward exchange rate
Currency
appreciation
depreciation
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