Moving the delivery date of a currency receivable
The largest segment of the Foreign Exchange (FX) market is FX swaps. A useful resource to monitor developments is the triennial survey published by the Bank for International Settlements (BIS)
Suppose a UK exporter who has sold goods to the USA issued an invoice with payment expected in 1 month’s time. With the USD relatively strong against GBP, they decide to invoice them in USD and to manage the currency risk by selling the USD forward for GBP.
They hear nothing more from the client but just before the expected delivery of cash they receive an email saying the money will not be paid for another month. However, the exporter has a contract to settle an FX trade in the next couple of days.
The exporter decides to use an foreign exchange swap, which will push the settlement date back by one month. The spot leg of the swap will reverse the cash flows of the original deal, while the forward leg pushes the settlement date forward by another month. (See this previous post for more details on how FX swaps work)
So, the swap transaction would be:
Spot deal: Sell GBP / buy USD
Forward deal: Buy GBP / sell USD
It is probable the swap will lead to a cash flow mismatch between the original forward and the spot leg of the FX swap, which will need to be settled. However, the net result is the original settlement date has moved forward by a month.