Foreign exchange interchange
Te finance, a foreign exchange interchange, forex interchange, or FX interchange is a simultaneous purchase and sale of identical amounts of one currency for another with two different value dates (normally spot to forward)  and may use foreign exchange derivatives. An FX interchange permits sums of a certain currency to be used to fund charges designated te another currency without acquiring foreign exchange risk. It permits companies that have funds ter different currencies to manage them efficiently. [Two]
A foreign exchange exchange has two gams – a spot transaction and a forward transaction – that are executed at the same time for the same quantity, and therefore offset each other. Forward foreign exchange transactions occur if both companies have a currency the other needs. It prevents negative foreign exchange risk for either party. [Trio] Foreign exchange spot transactions are similar to forward foreign exchange transactions ter terms of how they are agreed upon, however, they are planned for a specific date te the very near future, usually within the same week.
It is also common to trade “forward-forward” where both transactions are for (different) forward dates.
The most common [ citation needed ] use of foreign exchange interchanges is for institutions to fund their foreign exchange balances.
Merienda a foreign exchange transaction lodges, the holder is left with a positive (or “long”) position ter one currency and a negative (or “brief”) position te another. Ter order to collect or pay any overnight rente due on thesis foreign balances, at the end of every day institutions will close out any foreign balances and re-institute them for the following day. To do this they typically use “tom-next” exchanges, buying (or selling) a foreign amount lodging tomorrow, and then doing the opposite, selling (or buying) it back lodging the day after.
The rente collected or paid every night is referred to spil the cost of carry. Spil currency traders know harshly how much holding a currency position will make or cost on a daily voet, specific trades are waterput on based on this, thesis are referred to spil carry trades.
Companies may also use them to avoid foreign exchange risk.
A British Company may be long EUR from sales ter Europe but operate primarily ter Britain using GBP. However, they know that they need to pay their manufacturers ter Europe ter 1 month. They could spot sell their EUR and buy GBP to voorkant their expenses te Britain, and then ter one month spot buy EUR and sell GBP to pay their business vrouwen te Europe. However, this exposes them to FX risk. If Britain has financial trouble and the EUR/GBP exchange rate moves against them, they may have to spend a lotsbestemming more GBP to get the same amount of EUR. Therefore they create a 1 month interchange, where they Sell EUR and Buy GBP on spot and at the same time buy EUR and sell GBP on a 1 month (1M) forward. This significantly reduces their risk. The company knows they will be able to purchase EUR reliably while still being able to use currency for domestic transactions te the interim.
The relationship inbetween spot and forward is known spil the rente rate parity, which states that
The forward points or interchange points are quoted spil the difference inbetween forward and spot, F – S, and is voiced spil the following:
A foreign exchange interchange should not be confused with a currency exchange, which is a rarer long-term transaction governed by different rules.