What is the purpose of a swap in foreign exchange transactions?

The purpose of a swap in foreign exchange transactions is to exchange currencies for a specified duration, which corresponds to the function outlined in the chosen answer. A foreign exchange swap allows parties to exchange specified amounts of different currencies at the outset and agree to reverse the exchange at a later date, typically at the same rates or rates that have been predetermined. This mechanism is particularly useful for managing foreign currency exposure and liquidity needs, as it provides companies and financial institutions with a means to obtain the currency they need for their operations while simultaneously managing their foreign exchange risk.

Foreign exchange swaps are often employed by entities needing to hedge their currency risk or to secure funding in different currencies without the need for physical settlement, simplifying cash flow management over time.