Swap carousel (merry-go-round contracts in central bank covered forward exchange)

Unsound transactions between banks and the central bank, which take place according to the following sequence: – Banks buy favorable, i.e.: above the general market conditions, hedged forward currency (practically: USD) from their central bank. – The banks sell these contracts to foreign countries. The profit corresponds to the difference between the swap rate of the free market (assumed: Report of 3 percent – and the more favorable rate with the central bank – Assumed: Report of 4 percent. – With the countervalue from the sale of the forward dollar contracts, the banks immediately procure hedged forward foreign exchange from their central bank. These are again sold to non-residents at a profit. – The proceeds are again used to purchase contracts; see . – In this way, the aim of the central bank’s swap policy in this case, namely to entice banks to engage in the futures market (money exports) and to smooth in advance exchange rate breakouts between currency blocks, is counteracted to the best of its ability. – See swap policy, swap rate.

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University Professor Dr. Gerhard Merk, Dipl.rer.pol., Dipl.rer.oec.
Professor Dr. Eckehard Krah, Dipl.rer.pol.
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