Assume we have an exporter who is looking to hedge their USD exposure. How would they decide between choosing a FX swap or a FX forward contract to do so? I understand that a swap has 2 exchanges, while a forward is just 1 at settlement date. But would like to understand why one would be chosen over the other. Thanks!
An FX swap exposes the user to a risk that is intrinsic to the interest rate differentials and supply and demand factors of one currency relative to another, but fundamentally there is negligible exposure to the spot FX rate, since one essentially agrees to a buy price and a sell price separated by a fixed amount.
A forward FX contract is an agreement to exchange FX at a specific rate. This exposes the user to the risk that spot FX rates move (since spot FX is the dominant driver of forward FX rates), and one has essentially only agreed to a buy price, whereas the sell price is left to chance of the FX market. The forward part (i.e. settlement) is usually only a consideration based on whether you want (or need) to settle at some future point, and will have the currency available.
For example, say if one is an exporter based in EUR, who sells products in USD, and therefore regularly receives future cashflows in USD, then one has genuine risk to the EURUSD FX spot rate. The best hedge is to transact a forward FX converting USD to EUR at prior agreed (and therefore known) values based on the future profile of expected cash receipts.