What are FX swap rates used for?

FX swap rates are primarily utilized in the context of foreign exchange transactions to facilitate the management of currency exposure through a straightforward mechanism. When you think about the function of FX swap rates in financial transactions, they serve as the underlying benchmark or default rates for entering into forward foreign exchange transactions. This is because when businesses or financial institutions engage in an FX swap, they are essentially agreeing to exchange currencies at specified rates for a future date, and these swap rates help in determining the terms of that exchange.

With FX swaps, the focus is on ensuring that the participants can lock in rates now for future dates, providing certainty in foreign exchange costs and aiding in hedging against currency fluctuations. Consequently, the provided answer accurately captures a fundamental use of FX swap rates, as they act as the reference point or values that organizations might default to when establishing forward contracts.