FX Outrights, are they really two trades: spot and swap?

Beginner Questions
1

I’m doing some projects related to FX/MM trading, and I keep hearing from our trading desk that FX Outrights is really two transactions: a spot transaction and a swap transaction. This doesn’t really correspond to the textbook knowledge I have looked up on during the projects, where outrights are a separate type of transaction. However textbook instrument descriptions and practical implementation often differes, so can someone please explain to me what is meant by this?

2

Hi Suppai,

Welcome to the forum!

Whoever told you this might be referring to the fact that when you place a forex trade there are 2 ways that you could earn or lose money. The most obvious way that you could make or lose money is from the price movement. The second way to earn or lose money from trading currency is from the rollover interest, also known as the swap.

Each currency has a interest associated with it. When you hold a forex trade open from one day to the next, you will earn or pay rollover interest based on the difference between the interest rates of the two currencies you are trading. There is even a whole trading strategy based on holding forex trades long term to collect the rollover interest. This strategy is called carry trading. You might be interested in checking out this thread about carry trading.

Jason

3

Thank for the answer Jason, that actually makes a bit of sense in the context of the project.

4

Spot and swap are completely different things…

5

Yes, I’m aware of that, and my post never stated that they were the same, simply that outrights were refered to as being a combination of a spot and a swap transaction in practice in the context of the project. The guys that stated this have 25+ years experience in pro FX/MM trading, and most of them have traded in most of the worlds financial centers, so they know what they are talking about. So the fact that they say this, is either because they refer to a specific aspect of it that can be viewed that way, or because the outrights are implemented in a non-textbook way in the trading books. It should be noted that there are different desks for spot and mm trading and that there is also a split of some performance- as well as risk measurements between spot and mm trading in the case of outrights, which may indicate that the spot and swap statement is not complete nonsense.