Receivables management and Swap points: Difference between pages

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If trade receivables are allowed to rise too high, the business will have to wait a long time before it receives cash from its customers for credit sales, resulting in the need for higher levels of capital investment in the business and increasing the risk of non-payment.
''FX swaps''


But if trade receivables are maintained at too low a level, less generous credit terms may drive customers away, resulting in lost sales.
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.


Effective receivables management - among other things - identifies an appropriately balanced level of receivables.
 
<span style="color:#4B0082">'''Example 1: Low side points'''</span>
 
The spot exchange rate is:
 
GBP 1 = 1.6000 - 1.6010 USD.
 
The forward points - also known as the swap points - are 5-8.
 
The <u>outright</u> 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 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 1.6000 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 customer pays away fewer USD in the near leg, per 1 GBP received.)
 
 
<span style="color:#4B0082">'''Example 2: High side points'''</span>
 
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 1.6010 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.)




== See also ==
== See also ==
* [[Aged debtors' analysis]]
* [[CCIRS]]
* [[Days receivables outstanding]]
* [[CertFMM]]
* [[CertICM]]
* [[Far leg]]
* [[Receivables]]
* [[Forward points]]
* [[Foreign exchange swap]]
* [[Near leg]]
* [[Points]]
* [[Swap rate]]
 
[[Category:Financial_management]]
[[Category:Manage_risks]]
[[Category:Cash_management]]

Revision as of 10:35, 13 November 2016

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 = 1.6000 - 1.6010 USD.

The forward points - also known as the swap 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 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 1.6000 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 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 1.6010 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.)


See also