In finance, a forex swap (or FX swap) is a simultaneous purchase and sale of identical amounts of one currency for another with two different value dates (normally spot to forward); see Foreign exchange derivative. Once a foreign exchange transaction settles, the holder is left with a positive (or long) position in one currency, and a negative (or short) position in another. In order to collect or pay any overnight interest due on these 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 swaps, buying (or selling) a foreign amount settling tomorrow, and then doing the opposite, selling (or buying) it back settling the day after. A forex swap should not be confused with a currency swap, which is a much rarer, long term transaction, governed by a slightly different set of rules Even though US dollars and other currencies are no longer convertible into gold from official gold reserves, they still can function as official international reserves.
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