Swap points
FX swaps.
The difference between the exchange rates applied to the near leg and the far leg of an FX swap.
For example the spot exchange rate is GBP 1 = 1.6000 - 1.6010 USD;
And the outright forward points are 5-8.
The outright forward exchange rate quote is GBP 1 = 1.6005 - 1.6018 USD.
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.
1.
For a price-taker 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 1.6000 per 1 GBP.
FAR LEG: Buying USD at a rate of USD 1.6005 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.)
2.
For a price-taker 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 1.6010 per 1 GBP.
FAR LEG: Selling USD at a rate of USD 1.6018 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.)
