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''FX swaps.''
''FX swaps''.


The difference between the exchange rates applied to the near leg and the far leg of an FX swap.
The difference between the exchange rates applied to the near leg and the far leg of a foreign exchange (FX) swap.


The definition and pricing of FX swaps are discussed in more detail on the page [[foreign exchange swap]]s.


For example the spot exchange rate is


GBP 1 = 1.6000 - 1.6010 USD;
<span style="color:#4B0082">'''Example 1: Low side points'''</span>


And the outright forward points are 5-8.
The spot exchange rate is:


The <u>outright</u> forward exchange rate quote is
GBP 1 = 1.3000 - 1.3010 USD.


GBP 1 = 1.6005 - 1.6018 USD.
The forward points - also known as the swap points - are 5-8.


The <u>outright</u> forward exchange rate quote is:


The pricing of a related FX swap contract would be favourable for the price-taker (compared with two related outright contracts) for example as follows.
GBP 1 = 1.3005 - 1.3018 USD.




1.  
The pricing of a related FX swap contract would be favourable for the price-taker (compared with an outright spot exchange and an outright forward contract) for example as follows.


For a price-taker selling USD in the near leg and BUYING back a related amount of USD in the far leg.
 
For a customer selling USD in the near leg and BUYING back a related amount of USD in the far leg.


The swap points would be +5 (because these are the points applying to calculate an outright forward BUYING rate for a client buying USD forward).
The swap points would be +5 (because these are the points applying to calculate an outright forward BUYING rate for a client buying USD forward).


The swap points of +5 applied to calculate the differential between the near leg rate and the far leg rate would produce, for example:
The swap points of +5 applied to calculate the differential between the near leg rate and the far leg rate would produce, for example:


NEAR LEG: Sale of USD at rate of USD 1.6000 per 1 GBP.
NEAR LEG: Sale of USD at rate of USD 1.3000 per 1 GBP.
 
FAR LEG: Buying USD at a rate of USD 1.3005 per 1 GBP.
 


FAR LEG: Buying USD at a rate of USD 1.6005 per 1 GBP.
The selling rate of USD 1.3000 in the Near leg is better for the price taker, compared with the outright spot selling rate of USD 1.3010 per 1 GBP.


The selling rate of USD 1.6000 in the Near leg is better for the price taker, compared with the outright spot selling rate of USD 1.6010 per 1 GBP.  (The price taker pays away fewer USD in the near leg, per 1 GBP received.)
(The customer pays away fewer USD in the near leg, per 1 GBP received.)




2.
<span style="color:#4B0082">'''Example 2: High side points'''</span>


For a price-taker buying USD in the near leg and SELLING back a related amount of USD in the far leg.
For a customer buying USD in the near leg and SELLING back a related amount of USD in the far leg.


The swap points would be +8 (because these are the points applying to calculate an outright forward SELLING rate for a client selling USD forward).
The swap points would be +8 (because these are the points applying to calculate an outright forward SELLING rate for a client selling USD forward).


The swap points of +8 applied to calculate the differential between the near leg rate and the far leg rate would produce, for example:
The swap points of +8 applied to calculate the differential between the near leg rate and the far leg rate would produce, for example:


NEAR LEG: Buying USD at rate of USD 1.6010 per 1 GBP.
NEAR LEG: Buying USD at rate of USD 1.3010 per 1 GBP.


FAR LEG: Selling USD at a rate of USD 1.6018 per 1 GBP.
FAR LEG: Selling USD at a rate of USD 1.3018 per 1 GBP.


The buying rate of USD 1.6010 in the Near leg is better for the price taker, compared with the outright spot buying rate of USD 1.6000 per 1 GBP.  (The price taker RECEIVES more USD in the near leg, per GBP 1 paid away.)
 
The buying rate of USD 1.3010 in the Near leg is better for the price taker, compared with the outright spot buying rate of USD 1.3000 per 1 GBP.   
 
(The price taker RECEIVES more USD in the near leg, per GBP 1 paid away.)




== See also ==
== See also ==
* [[CertFMM]]
* [[Cross-currency interest rate swap]]
* [[Far leg]]
* [[Far leg]]
* [[Forward points]]
* [[Forward points]]
* [[FX swap]]
* [[Foreign exchange swap]]
* [[Near leg]]
* [[Near leg]]
* [[Points]]
* [[Swap rate]]
* [[Swap rate]]


==Other resource==
*[https://learning.treasurers.org/resources/how-to-do-fx-swaps Student article - How to use foreign exchange swaps]
[[Category:Financial_management]]
[[Category:Manage_risks]]
[[Category:Financial_management]]
[[Category:Manage_risks]]
[[Category:Manage_risks]]
[[Category:Cash_management]]

Latest revision as of 20:58, 25 December 2024

FX swaps.

The difference between the exchange rates applied to the near leg and the far leg of a foreign exchange (FX) swap.

The definition and pricing of FX swaps are discussed in more detail on the page foreign exchange swaps.


Example 1: Low side points

The spot exchange rate is:

GBP 1 = 1.3000 - 1.3010 USD.

The forward points - also known as the swap points - are 5-8.

The outright forward exchange rate quote is:

GBP 1 = 1.3005 - 1.3018 USD.


The pricing of a related FX swap contract would be favourable for the price-taker (compared with an outright spot exchange and an outright forward contract) for example as follows.


For a customer selling USD in the near leg and BUYING back a related amount of USD in the far leg.

The swap points would be +5 (because these are the points applying to calculate an outright forward BUYING rate for a client buying USD forward).


The swap points of +5 applied to calculate the differential between the near leg rate and the far leg rate would produce, for example:

NEAR LEG: Sale of USD at rate of USD 1.3000 per 1 GBP.

FAR LEG: Buying USD at a rate of USD 1.3005 per 1 GBP.


The selling rate of USD 1.3000 in the Near leg is better for the price taker, compared with the outright spot selling rate of USD 1.3010 per 1 GBP.

(The customer pays away fewer USD in the near leg, per 1 GBP received.)


Example 2: High side points

For a customer buying USD in the near leg and SELLING back a related amount of USD in the far leg.

The swap points would be +8 (because these are the points applying to calculate an outright forward SELLING rate for a client selling USD forward).


The swap points of +8 applied to calculate the differential between the near leg rate and the far leg rate would produce, for example:

NEAR LEG: Buying USD at rate of USD 1.3010 per 1 GBP.

FAR LEG: Selling USD at a rate of USD 1.3018 per 1 GBP.


The buying rate of USD 1.3010 in the Near leg is better for the price taker, compared with the outright spot buying rate of USD 1.3000 per 1 GBP.

(The price taker RECEIVES more USD in the near leg, per GBP 1 paid away.)


See also


Other resource

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