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Currency swaps and FX forwards

7 minute read · By Krishna Avadhani, Vestora Academy · Updated 18 October 2026

An FX forward fixes an exchange rate for a future date. The forward rate differs from spot by the interest rate gap between the two currencies (covered interest parity), not by a forecast of where the currency will go.

A cross-currency swap exchanges principal and interest in two currencies, for example an Australian company that borrowed in US dollars swapping the payments into Australian dollars. Central banks use FX swap lines with each other to supply dollars in a crisis, as the US Federal Reserve did in 2008 and 2020.

International ETFs often come in hedged and unhedged versions. The hedged versions use rolling FX forwards; the cost or benefit of hedging depends on the interest rate gap.

Formula

F = S x (1 + r_quote) / (1 + r_base)  (covered interest parity, simple form)

Key takeaways

  • Forward FX rate = spot adjusted for the interest rate gap.
  • Cross-currency swaps convert foreign debt to home currency.
  • Hedged ETFs use rolling FX forwards.

Check your understanding

1. Forward exchange rates mainly reflect...

  • Analyst forecasts
  • Interest rate differences between the two currencies
  • Trade balances
  • Gold prices
Show the answer

Interest rate differences between the two currencies. Covered interest parity links forwards to rate gaps.

2. A currency-hedged global ETF mainly uses...

  • Rolling FX forwards
  • Gold
  • Credit default swaps
  • Covered calls
Show the answer

Rolling FX forwards. Forwards lock in exchange rates for each period.

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General education only, not financial advice. Examples are illustrations. Rules, tax settings and products change; check official sources.