Swap points

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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.)


See also