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JeremyWS
Topic Author
Posts: 5
Joined: May 10th, 2013, 8:31 pm

FX swaps

January 1st, 2014, 12:52 am

Hi,I was wondering quickly how (or if you can) express an interest rate position using FX forwards and Spot.For example, imagine I wanted to be exposed to a position that is "long" AUD rates vs USD.Take the AUD 6M swap at about 106 points, this implies a yearly yield of about 2.38%, how can I trade using a 6M forward and spot so that I profit if the yield goes up and have no (or very little) FX exposure?I was thinking sell the forward and buy spot, but I wasn't sure if that works, especially as the forward "decays" toward the spot price over time so it doesn't quite work?Thanks in advance, and happy new year.Jeremy.
 
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giladr
Posts: 30
Joined: May 28th, 2008, 5:22 am

FX swaps

January 1st, 2014, 6:14 am

Hi Jeremy,I'll try to explain FX Swaps quickly:FX Swap is simultaneously buying and selling of fx spot and fx forward. You can do both directions (buy & sell, sell & buy -> fx spot & fx forward respectively).Obviously, you don't execute 2 deals, and dealer will quote you the difference between the spot and forward (actually, it can be 2 forwards, so the diff between leg#1 and leg#2).Exposure wise, this is equivalent to a cross currency irs, where the rates exchanged are both fixed, with one rate set off-market at 0%.The exposures you will get is long dv in one ccy and short dv in the other ccy (supposed to be the respective OIS curves, assuming you have a reasonable CSA in place), plus a long/short ccy1/ccy2 basis exposure - this is also heavily dependent on your institution (a US bank with access to fed funds will have a different discount curve than a EUR bank for example, and thus differenet IR attached to the same ccy).Spot exposure results from NPV calculation, which means (assuming mid-market, i.e. npv=0 at inception) you get some positive npv in ccy1 and the same amt of negative npv in ccy2 (thus netting npv=0). This absolute amt of npv is your spot exposure, and this spot exposure will be different if you're a USD bank or a EUR bank or a TRY bank, because of the different discount curves you will use.FX Swaps are liquid usually upto 1 year (very liquid ccys will be quoted to somewhat longer maturites) and above 1 year cross ccy irs takes over liquidity wise.Hope this made sense.
 
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Pasargad
Posts: 94
Joined: July 14th, 2002, 3:00 am

FX swaps

April 4th, 2014, 5:08 am

sell USD / buy AUD spotbuy USD / sell AUD forward (6months say)in one month (say), roll the forward leg to go back to a 6 month exposure.This way you should roughly stay long AUD rate / short USD rate with a maturity of 5.5months.It would not be a pure rate trade though as the xccy basis (and supply/demand for USD cash vs AUD cash) would come into play (as noted by Giladr).
 
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cosmologist
Posts: 640
Joined: January 24th, 2005, 8:08 am

FX swaps

December 2nd, 2014, 7:19 pm

Hi Jeremy,You said" Obviously, you don't execute 2 deals, and dealer will quote you the difference between the spot and forward (actually, it can be 2 forwards, so the diff between leg#1 and leg#2)."What about the Spot and the forward leg of the deal. there is a spot transaction in which currencies are exchanged, I guess.
Last edited by cosmologist on December 1st, 2014, 11:00 pm, edited 1 time in total.
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