spot Forward USD rate 4.

50% Swiss Firm needs NOW

USD/CHF 1.6450 1.6580 CHF rate 6.50% It can buy USD in Spot market N
start USD 1,000,000 CHF 1,645,000 Or
6.50% 53,463 It can borrow in USD
Int for 6 months
CHF 1,698,464 Cash outflow 6mths hence
USD 1,024,405 It will need
It will need to invest today
(F-S)/S = 1.58% which is less than 2.00%

Hence CHF fwd is overvalued USE Money Market - forward ma

US firm needs six months from n

If it buys CHF in FWD market

Or
To have 1 million CHF in 6 month
Buy in Spot market by paying
USD Loan will cost
Total

USE Spot market -money market

 SWISS FIRM
Swiss Firm needs NOW 1,000,000 USD to settle imports
It can buy USD in Spot market NOW 1,645,000 CHF

It can borrow in USD 1,000,000 USD

Int for 6 months 22,500 USD
Cash outflow 6mths hence 1,022,500 USD
It will need 1,695,305 CHF 1,022,500*1.6580
It will need to invest today 1,641,942 CHF 1695305/(1+6.5%/2)

Saving 3058 CHF

USE Money Market - forward market route

US FIRM

US firm needs six months from now 1000000 CHF to pay a maturing payable

If it buys CHF in FWD market 603,136 USD 1000000/ 1.6580

To have 1 million CHF in 6 months , deposi 968,523 CHF

Buy in Spot market by paying 588,768 USD
USD Loan will cost 13247 USD
602015 USD
Saving 1,121 USD
USE Spot market -money market route
Problem CH 8 Page 216
Bid Ask
Quote received: GBP/USD spot 1.5625 1.5635
USD rate 8.25% 8.50%
GBP Rate 12.625% 13.00%

Borrow GBP 1 Convert to USD

Pay Interest GBP 0.1300 Invest in USD
Total in GBP 1.1300
No Riskless profit (no arbitrage) at

REVERSR CASE:

Borrow USD 1 Convert to GBP

Pay Interest USD 0.085 Invest in GBP
Total in USD USD 1.085
No Riskless profit (no arbitrage) at

Hence forward quote must lie between 1.4968

 1.5625
1.6914

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

CHF/ KPW Spot 748 /

Euro CHF 3mth 2.00% -
KPW 3mth 5.00% -

What swap margin should the Bank quote

Swap done at spot rate of, say 748

Bank borrows and gives to cutomer KPW

Interest rate on borrowing
At maturity Bank repays (principal +Interest) KPW

Banks receives and invests CHF

Interest rate on deposit
At maturity Bank will have CHF

Bank will break even if its fwd rate is

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

Work through the latter problem on Page 224 on your own

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

754.51 equal to 758.29 / 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

Today On Maturity Date

Deliver Receive Deliver

Customer CHF 1,000,000 748,000,000 754,512,438

Your Bank KPW 748,000,000 1,000,000

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)

Say, Forward rate charged to customer 785 785,000,000

Profit in KPW 26,715,000
Profit in CHF 176
Maturity Date
Receive

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

Bank A confirms that it wishes to sell forward>>> USD

Hence Bank B agrees to buy 3mth fwd at USD/JPY

Bank B will immediately need to cover this:

Three months hence

Bank B will receive USD 15 mio and pay

Hence it will need to sell USD 15 mio forward

This is achieved by

1 selling 3mth forward USD 15 mio Receive

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 mio at a discount of 0.32

121.63 (121.95 -0.32)

JPY 1824.45 mio

JPY 1825.50 mio Gain JPY 1.05 mio

JPY 1825.50 mio Gain JPY 1.05 mio

or could go to cover Bank B's already exisitng short position.

a discount is justified only if this discount

(derived earler)
 15

15
 OPTIONS FORWARD PGA CH 8 sec 8.6 pg 227

On a given day

USD/CHF Spot 1.6200 / 10

Swap points 3 mth fwd 250 / 240
6 mth fwd 500 / 480
Hence 3 mth outright fwd 1.5950 / 1.5970 USD/CHF
6 mth outright fwd 1.5700 / 1.5730 USD/CHF

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

3mth and 6 mth.

n option to settle anytime between spot date and 3mth fwd date.

e customer, i.e. quote 1.6210.

an option to settle anytime between spot date and 3mth fwd date.

to the customer, i.e. 1.5950.

for buying CHF (Sell USD)

wrong
(Hi / Lo - subtract)
 Following rates quoted in the maket

GBP/USD Spot 1.7580 / 90

Swap 1mth 20 / 10
2mth 30 / 20
3mth 40 / 30
6mth 40 / 30
12mth 30 / 20

Home Currency: USD

Expectation: US int rates somewhat below UK int rates, less so at the far end
UK int rates will fall , GBP will go into premium
6mth premium to go upto 100 / 200

1 Outright speculation

Today, Buy GBP 5

Six months hence, Sell GBP 5

since GBP /USD spot and fwd rates 1.7585 / 95
Profit USD 27500

2 Creating a Swap GBP/USD

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

Say, at the end of six months , GBP/USD Spot 1.7000

Buy GBP 5 mio (Sell USD) spot and sell GBP (buy USD) 6mth fwd
Spot 6mth
GBP 5 -5
USD -8.5025 8.5400
@ 1.7005 1.7080

Net gain -10000 USD

37500 USD
27500 USD

Say, at the end of six months , GBP/USD 1.8000

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

Net gain -10000 USD

35000 USD
25000 USD

Say, at the end of six months , GBP/USD 1.8000

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

12 months from now 6 months from 6 months h

Pay Receive Pay
mio 12 mth fwd @ 1.7570 8.785 USD 8785000

mio 6 mths fwd @ 1.7625 8.8125 GBP 5000000 5000000

and GBP at premium 40 : 60
27500 Profit USD 27500

Today
) 6mth fwd spot Buy GBP Sell USD X
) 12 mth fwd 6mth fwd Sell GBP Buy USD Y

spot Sell GBP buy USD X

12mth fwd Buy GBP Sell USD
Six Months hence
spot Buy GBP Sell USD
 6mth fwd Sell GBP Buy USD

1.7005 80 : 160

1.8010 80 : 160 (int rate forecast materialized)

1.8010 60 / 40 (int rate forecast DID NOT materialized)

6 months from 6 months hence
Receive
8812500

+ GBP / - USD
- GBP/ + USD

- GBP / + USD
Z + GBP / - USD

Y + GBP / - USD
 Z - GBP/ + USD

aterialized)
 Forward Spread Agrement (pg 231)

GBP / USD spot 1.4995 / 1.5005

3 mth swap points 92 / 83 9 mth swap points
3 mth Euro USD 5.50% 9 mth Euro USD
3 mth Euro GBP 8.00% 9 mth Euro GBP

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

At the end of three months

GBP / USD spot 1.4500
6 mth Euro USD 7.00%
6 mth Euro GBP 8.00%

Hence, 6 mth GBP/USD implied 1.4430

3 Spot Buy GBP 1000000 spot

4 swap 6 mth fwd Sell GBP 1000000 forward
 290 / 269
6.25% Today
8.80% Pay Receive
GBP 1,000,000 1,000,000
USD 1,500,000 1,500,000
ill soften

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

(for) notional INR diff 175,000

USD equivlent to pay 3188

Computation 27,625,000

Pay INR
Net cash flow
for Indian importer 27,450,000
rable Forward (Page 240 PGA)

Buy USD, sell INR

Note: NDF is normally a market
mth fwd
On settlement date
Pay INR 27,625,000
Receive USD 500,000

USD/INR
INR equivalent
Pay INR 27,450,000
Receive USD 500,000
(for) INR difference to pay
USD equivalent to receive

500,000

Eff. rate Net receiveUSD

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

INR Eff.rate Net receive USD

27,825,000 55.25 503,594

Pg 176 Broken date contract

Today is Sept 7th

Settlement date Nov `19th

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

Recall Subtract if Big Small

Add if Small Big

Settlement date Nov 19th

Bid Ask spread increases by 75 points for 30 days

2.5 points per day

Hence for Nov 19th, add 25 points for ten days

Fwd rate on Nov 19th 1.7005

 Computation of fwd rates instead of working on points
Also, say, 3 mth fwd points at premium
Settlement
Bid Ask Date
GBP/USDspot 1.7075 1.7080 Sept 9th
2 mth Fwd 45 35 Nov 9th
3 Mth Fwd 120 110 Dec 9th

Settlement Date Nov 19th

2 mth fwd rate 1.7030 1.7045

3 mth fwd rate 1.7195 1.7190 swap @110/120
Hence forward rate for 19th No 1.7085 1.7093

3 mth fwd rate 1.6955 1.6970 swap @ 120/110

Hence fwd rate for 19th Nov 1.7005 1.7020
 Forward Forward Swap Agreement

GBP / USD spot 1.4995 / 1.5005

3 mth swap points 92 / 83 9 mth sw 290 / 269
3 mth Euro USD 5.50% 9 mth Euro USD 6.25%
3 mth Euro GBP 8.00% 9 mth Euro GBP 8.80%

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

At the end of three months

GBP / USD spot 1.4500
6 mth Euro USD 7.00%
6 mth Euro GBP 8.00%

Hence, 6 mth GBP/USD implied 1.4430

3 Spot Buy GBP 1000000 spot Sell USD

4 swap 6 mth fwd Sell GBP 1000000 forward Buy USD
 Cash Flows
Today 3 mths hence 9 mths hence
Pay Receive Pay Receive Pay Receive
GBP 1,000,000 1,000,000 1,000,000 1,000,000 1,000,000 1,000,000
USD 1,500,000 1,500,000 1,450,000 1,490,809 1,473,089 1,443,029

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