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SS 07 PGA CH 8 Fwds Swaps and Interest Parity
SS 07 PGA CH 8 Fwds Swaps and Interest Parity
SS 07 PGA CH 8 Fwds Swaps and Interest Parity
US FIRM
US firm needs six months from now 1000000 CHF to pay a maturing payable
REVERSR CASE:
1.4968
0.6396
0.72034
1.5062
and 1.5062
CH 8 page 223 Swap and Deposit Market
Customer requestd Bank for a 3mth CHF/KPW swap, customer will sell CH
This means, in the spot leg, Bank will receive CHF and give KPW to customer
in the forward leg, Bank will receive KPW and give CHF
Note:
Cutomer will buy back CHF 1 million and pay KPW 754.51
The remining 3.77
must be bought in the outright forward market with the additonal CHF
Break even at CHF/KPW 754.51
Step 1
Step 4
Step 2
Step 3
Step 5
wap, customer will sell CHF
ve KPW to customer
and give CHF
754
2.50%
5.50%
748.00 million
5.50%
758.29 million
1.00 million
2.00%
1.005
million
million (i.e.758.29-754.51)
e additonal CHF 0.005 million
(equal to 3.77 / 0.005)
n your own
Borrow KPW
748,000,000 from
Korean Bank
@5.5%pa KPW 748,000,000 758,285,000
Invest CHF 1,000,000
@2% p.a. CHF 1,000,000
Spot Rate 748
computed Forward rate 754.51
Difference (758,285,000)
1,000,000
1,005,000
5,000.00 151,657.00
Bank B quotes 32 / 25 to Bank A (Note: point in USD /JPY FX Swap quot
That means, Bank B will buy USD three months forward at a discount
and sell USD three months forward at a discount
at the agreed spot rate of USD/JPY
This is achieved by
OR
2 find a counter party to do a swap
Sell 3mth FWD USD 15 mio Recive
Buy spot USD 15 mio
The overbought spot USD could be sold in the spot market or could go to cover Ba
or sell USD in spot market for exchange profit
3 or roll-over (swap next)
NOTE: Bank B's decision to buy 3mth Euro USD forward at a discount is justified o
expressed as a percentage of the spot rate,
annualized , equals interest rate diferential between USD and JPY
USD /JPY FX Swap quote is 0 .01, not .0001)
0.32 JPY
0.25 JPY
121.95
15
OPTIONS FORWARD PGA CH 8 sec 8.6 pg 227
On a given day
CHF is quoting at a premium (USD at a discount) both for 3mth and 6 mth.
Customer wishes to sell CHF (buy USD) 3 mth fwd , with an option to settle anytime b
Bank will have to buy CHF (Sell USD)
The Bank's spot selling rate is 1.6210 and 3 mth fwd 1.5970.
Hence the Bank will give the least possible premium to the customer, i.e. quote 1.621
If customer wishes to buy CHF (sell USD) 3 mth fwd , with an option to settle anytime
Bank will have to sell CHF (buy USD)
The Bank's spot buying rate is 1.6200 and 3 mth fwd 1.5950
Hence the Bank will charge the highest possible premium to the customer, i.e. 1.5950
For a six mth contract with option period from 3 mth to 6 mths
it will charge 1.5700 for selling CHF (buy USD) and 1.5970 for buying CHF (Sell USD)
3 mth fwd computation
1000000 Add 1.6450 1.6450
Subtract 1.5950 1.5970
USD/CHF
USD/CHF
n option to settle anytime between spot date and 3mth fwd date.
an option to settle anytime between spot date and 3mth fwd date.
1 Outright speculation
Today: (1) buy GBP (sell USD) spot and sell GBP (buy USD) 6mth fwd
(2) sell GBP (buy USD) spot and buy GBP (sell USD) 12 mth fwd
Both swaps done off a spot rate of 1.7580
Spot leg cancells out
On the swap leg 6mth 12mth
GBP -5 5
USD 8.7700 -8.7800
@ 1.7540 1.7560
Buy GBP 5 mio (Sell USD) spot and sell GBP (buy USD) 6mth fwd
Spot 6mth
GBP 5 -5
USD -9.0050 9.0400
@ 1.8010 1.8080
Buy GBP 5 mio (Sell USD) spot and sell GBP (buy USD) 6mth fwd
Spot 6mth
GBP 5 -5
USD -9.0050 8.9700
@ 1.8010 1.7940
Net gain -10000 USD
-35000 USD
-45000 USD
at the far end
Today
) 6mth fwd spot Buy GBP Sell USD X
) 12 mth fwd 6mth fwd Sell GBP Buy USD Y
1.7005 80 : 160
+ GBP / - USD
- GBP/ + USD
- GBP / + USD
Z + GBP / - USD
Y + GBP / - USD
Z - GBP/ + USD
aterialized)
Forward Spread Agrement (pg 231)
Expectation: USD interest rates will rise and GBP interest rates will soften
Hence likely reduction in USD premium
Spot rate
1 swap 3 mth fwd Buy GBP 1,000,000 1.5000
2 swap 9 mth fwd Sell GBP 1,000,000 1.5000
FWD rate
sell USD 1,490,809 1.490809
Buy USD 1,473,089 1.473089
1.45000
Exchng rate
Sell USD 1,450,000 1.4500
Buy USD 1,443,029 1.4430
Cash Flows
3 mths hence 9 mths hence
Pay Receive Pay Receive
1,000,000 1,000,000 1,000,000 1,000,000
1,450,000 1,490,809 1,473,089 1,443,029
-
10,749
Diff 40,809 (30,060)
Incl int@7% 42,237 12,177
Non Deliverable Forward (Page 240
USD 500,000
USD/INR 55.25
Settlement 6
INR to be paid 27,625,000
On settlement date
USD/INR 54.90
INR equivalent 27,450,000
Computation 27,625,000
Pay INR
Net cash flow
for Indian importer 27,450,000
rable Forward (Page 240 PGA)
USD/INR
INR equivalent
Pay INR 27,450,000
Receive USD 500,000
(for) INR difference to pay
USD equivalent to receive
500,000
55.25 496,812
Note: NDF is normally a market for specualtors, not hedgers
Only USD equivanet of profit / loss is settled
55.65
uivalent 27,825,000
Pay INR 27,825,000
Receive USD 500,000
NR difference to pay 200,000
quivalent to receive 3594
27,625,000 500,000
Settlement
Bid Ask Date
GBP/USD spot 1.7075 1.7080 Sept 9th
2 mth Fwd 45 35 Nov 9th
3 Mth Fwd 120 110 Dec 9th
Expectation: USD interest rates will rise and GBP interest rates will soften
Hence likely reduction in USD premium
Spot
1 swap 3 mth fwd Buy GBP 1,000,000 1.4500 sell USD
2 swap 9 mth fwd Sell GBP 1,000,000 1.4500 Buy USD
Net GBP
Forward Net USD
1,490,809 1.49081 Diff 40,809 (30,060)
1,473,089 1.47309 Incl int@7% 42,237
1.45000
1,450,000 1.45000
1,443,029 1.44303
-
10,749
12,177