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IMF: FX Swaps -- March 2010

IMF: FX Swaps -- March 2010

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Published by: FloridaHoss on Mar 17, 2010
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Assume the same example as in Box A.1. A domestic bank swaps DC105 in exchange for FX100, with the
swap to be reversed 12 months later at the forward price of DC110 to FX100. At the initiation of the
contract there is a spot sale/purchase of currencies reflected in the IIP but no changes in financial
derivatives:

Opening
Position

Changes in Position Reflecting
Transactions Valuation

Closing
Position

Portfolio investment
Financial derivatives
Other investment, currency and
deposits

0

100

100

Assume now that after six months, at end-March, the domestic currency has depreciated to 112 against the
foreign currency. Due to valuation changes, the IIP has changed:

Opening
Position

Changes in Position Reflecting
Transactions Valuation

Closing
Position

Portfolio investment
Financial derivatives

-6

-6

Other investment, currency and
deposits

100

100

After 12 months, when the FX swap matures, the domestic currency has depreciated to DC140 against the
foreign currency and more domestic currency will be needed to pay the FX liability, compared to the
forward price set at the initiation of the contract:

Opening
Position

Changes in Position Reflecting
Transactions Valuation

Closing
Position

Portfolio investment
Financial derivatives

-6

21

-15

0

Other investment, currency and
deposits

100

-21

79

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