Glsuni Mba 1820 If M2 P3 A

GLS UNI – MBA SEM III (2018-20)
PROF. SANDEEP R. SHROFF

ACADEMIC DIRECTOR, CPIPT
Spot and Forward

Forex Market
International Finance M2 – P3-A

IF - Spot and Forward Forex Market GLS UNI - MBA - 2018-20
FOREX market offers the following types of settlements
Cash / Ready (T+0) (same day delivery of currencies)

Tom / Value next day (T+1) (next working day
delivery of currencies)
Spot (T+2) (delivery on 2nd working day from trading)
Forward (>T+2) (delivery beyond 2 business days)

FX transactions
which are settled Thus, a spot contract entered
after 2 business days into on Monday will be settled on
from the date of the Wednesday, provided both
contract Tuesday and Wednesday are
working days in both the
(There can be “settlement” locations and the
exceptions e.g., CAD “dealing location” of the market-
is settled on T+1 making bank
basis against USD)
They are exchange rates used for spot

transactions, quoted in interbank and retail
markets
Typically used for settling

→ trade payments
→ investment/borrowing proceeds
→ retail needs

For BC: (New ER/Old ER) – 1
For QC: (Old ER/New ER) – 1
Converting appreciation into depreciation,

and vice versa:
− % 𝒄𝒉𝒂𝒏𝒈𝒆
Appreciation / Depreciation =
𝟏 +% 𝒄𝒉𝒂𝒏𝒈𝒆
A bank may intentionally increase or

decrease the midpoint to achieve desired
currency inventory position:
→ based on its view about appreciation /
depreciation, or
→ to level its current overbought / oversold
position

e.g., the current spot rate for INR/GBP = 85.7652/82

Mid-rate is 85.7667 (or mid-point in pips is 67)
A bank desirous of A bank desirous of increasing

decreasing its GBP inventory its GBP inventory may use
may use lower mid-point of higher mid-point of 75 and
60, and quote 85.7645/75 quote 85.7660/90
10

11
Forward • Market wherein forward rates are quoted

Market for entering into forward contracts
Forward • Contract for future purchase and sale of

Contract foreign exchange
• Exchange rate contracted today for

Forward Rate future delivery of foreign exchange
12
Quoted for standard maturities such as 1 or 2 weeks

and 1/3/6/9/12 months, or sometimes even 5 or 10 years
They help lock-in an ER for future purchase or sale of

currencies (Maturity > T+2)
Forward rates are expressed just like the spot rates

e.g., USD/EUR Spot = 1.1130/35 USD/EUR 6-m Fwd. = 1.1215/23

13
The same rules regarding inverse rates and cross rates

apply to forward rates too
Forward bid-offer spread increases with time to

maturity due to increasing liquidity risk, counterparty
credit risk, and interest rate risk
Forward rates can quote at a premium or discount to

spot rates
14
Forward Premium Forward Discount
Forward ER > Spot ER Forward ER < Spot ER
Base currency is appreciating, Base currency is depreciating,

and quoting currency is and quoting currency is
depreciating appreciating
e.g., INR/USD Spot = 68.7525/75 e.g., INR/USD Spot = 68.7525/75

INR/USD 3-m Fwd. = 69.1510/80 INR/USD 1-m Fwd. = 68.3565/30

15
Forward rates are Such forward

generally points duly convey
expressed as the amount of
forward points premium or
instead of a full discount for a
forward rate forward maturity
16
Forward points are For spot ERs quoted to 4

simply the difference decimals:
between the forward Forward points = (FR – SR)
ER quote and the spot x 10, 000
ER quote, with the
points scaled so that For spot ERs quoted to 2
they can be related to decimals:
the last decimal in the Forward points = (FR – SR)
spot quote x 100

17
What are the What are the

forward points for forward points for
the following the following
USD/GBP exchange JPY/USD exchange
rates? rates?
Spot = 1.2465 Spot = 108.90
2-m Fwd. = 1.2495 3-m Fwd. = 108.15
18
As with two-way forward

rates, two-way forward
points also have smaller bid
points and larger offer
points

19
What are the bid- What are the bid-

offer forward points offer forward points
for the following for the following
GBP/EUR exchange JPY/USD exchange
rate? rate?
Spot = 0.8925/65 Spot = 108.90/50
1-m Fwd. = 0.8985/45 3-m Fwd. = 107.40/15
20
When we wish to obtain a full

forward rate using the spot For spot ERs quoted to
rate and the forward points, 4 decimals:
reverse scaling is required
FR = SR + (FP/10,000)
Moreover, the bid-offer spread
in full forward rate is the sum
total of the bid-offer spread in
For spot ERs quoted to
the spot rate and the bid- 2 decimals:
offer spread in the forward
points FR = SR + (FP/100)

21
Convert the following

Convert the following
USD/AUD forward
INR/USD forward points
points into full forward
into full forward rates:
rates:
Spot = 68.8456/85
Spot = 0.6957/75
1-m Fwd. = 10/50
1-m Fwd. = -40/-18
3-m Fwd. = 20/80
3-m Fwd. = -50/-24
6-m Fwd. = 40/130
6-m Fwd. = -70/-30
22
In many forex markets, forward points do not show

forward discount points with a negative sign
In such markets, low/high points convey forward premium

and they are added to the spot bid and offer prices
On the other side, high/low points convey forward discount

and they are subtracted from the spot bid and offer prices

23
Compute the annualised

Annualised Forward premium of EUR against
Premium/Discount = INR from the following
𝑭𝑴𝒊𝒅 − 𝑺𝑴𝒊𝒅 𝟏𝟐 quotations:
× × 𝟏𝟎𝟎
𝑺𝑴𝒊𝒅 𝒎 INR/EUR Spot = 77.1235/95
3-m Fwd. = 80/170
0.065%
24
Determine the spot

Add forward months to it
settlement date
If the forward date is a

The resultant forward date
holiday, switch to next
must be a business day in
business day if it falls in the
both settlement locations
same month, otherwise go
and dealing location
to previous business day

25
3-m forward signed

2-m forward signed
Forward settlement on 15th May
on 5th February
date is 8th April (17th and 18th
(6th Feb is a holiday)
August are holidays)
1-m forward signed Forward settlement

Forward settlement
on 29th January of a date is 29th
date is 19th August
leap year February
26
Outright Broken Option

Forwards Forwards Forwards
Forward Swaps Non-deliverable

Forwards
(Swap Deals) (NDFs)

27
They are an OTC derivative contract
Agreements to exchange one currency for another on

a future date at an ER agreed on today
They are legally binding contracts with fixed obligation

for the long (buyer) and the short (seller)
28
Outright forwards are available for various standard

maturities
Outright forward rates can be derived by adjusting the

spot rates for the forward points for respective maturities
Forwards can be used by hedgers, speculators as well as

arbitrageurs

29
Broken forwards do not have a standard maturity
Their quotes are derived from interpolation

between surrounding standard maturity quotes
e.g., INR/USD Spot = 68.4500/5250

1-m Fwd. = 20/30
2-m Fwd. = 30/50
What is 1.5 months forward rate?
30
Compute 2.5 months forward

Compute 3-weeks forward rate from the following:
rate from the following:
JPY/USD Spot = 107.90/40
INR/GBP Spot = 85.6550/6850
2-m Fwd. = -95/-25
1-m Fwd. = 250/650
3-m Fwd. = -120/-35
3-w Forward Rate = 2.5-m Forward Rate =

85.67375 / 73375 106.825 / 108.100

31
Unlike an outright forward As per FEDAI rules, option

which has a fixed maturity period shall not extend
date, under an option beyond one month
forward the bank gives an
option to the customer to Option forwards are used
exercise the forward by those customers who are
contract at a fixed rate but not sure of exact date
any day during the option within a period on which
period they wish to buy or sell a FC
32
While quoting a fixed Then, they choose a quote

which is the most
forward rate valid for advantageous to the bank
the whole option i.e., disadvantageous to the
period, dealers client
compare the forward
quotes at the beginning
and at the end of the e.g., dealers offer the
lowest bid and the highest
option period offer for an option forward

33
Rule for Quoting Option Forward “Bid” Rate:

Add minimum premium (assuming earliest delivery)
Deduct maximum discount (assuming latest delivery)
Compute bid rate for the 2nd Compute bid rate for the 3rd
month option forward: month option forward:
INR/USD Spot = 68.8055/25 INR/GBP Spot = 85.7010/7240
1-m FP = 10/90 1-m Fwd. = -400/-150
2-m FP = 20/120 2-m Fwd. = -500/-200
3-m FP = 30/150 3-m Fwd. = -650/-300
34
Rule for Quoting Option Forward “Offer” Rate:

Add maximum premium (assuming latest delivery)
Deduct minimum discount (assuming earliest delivery)
Compute option forward offer Compute option forward offer

rate for 3rd week of 2nd month: for 2nd fortnight of 1st month:
INR/EUR Spot = 77.1530/75 INR/CNY Spot = 10.0030/40
1-m FP = 15/75 1-m Fwd. = -35/-15
2-m FP = 35/115 2-m Fwd. = -55/-25

35
A swap transaction is the Buy-Sell Swap

simultaneous sale (or Buy in spot, sell in forward
purchase) of spot foreign
exchange against a Sell-Buy Swap
forward purchase (or Sell in spot, buy in forward
sale) of approximately an Forward-Forward Swap
equal amount of the Buy in one forward
foreign currency maturity, sell in longer
i.e., it is a combination of forward maturity; or vice
two offsetting positions versa
36
Forward swaps are usually Illustration

quoted in swap points, also INR/USD Spot = 68.7924/64
known as swap rate 2-m Swap Rate = 40/90
Buy-Sell Swap: 68.7964/04

Swap rate (or quote) is a Sell-Buy Swap: 68.7924/14
forward point quote used
to decide the swap i.e., due to forward premium, a buy-
difference i.e. gain or loss in sell swap customer has smaller gain
of 40 points but a sell-buy swap
a swap deal customer has larger loss of 90 points

37
Illustration
Thus, in a swap deal, it
INR/EUR Spot = 77.5675/95
doesn’t really matter as to
3-m Swap Rate = -60/-25
what is the spot rate
Buy-Sell Swap: 77.5695/35
The net receivable/payable Sell-Buy Swap: 77.5675/50
in the combined deal is
determined using the swap i.e., due to forward discount, a buy-
rate and buy/sell rates are sell swap has larger loss of 60 points,
taken accordingly but a sell-buy swap has smaller gain
of 25 points
38
Utility of • If a person sold FC forward 2 month ago

and wishes to continue the sale position
Forward Swaps for another 1 month, just 2 days before
original forward’s maturity, he can buy FC
Extending the spot and simultaneously sell it 1 month
maturity of an forward (a buy-sell swap)
existing • A swap would be cheaper than outright
transactions
forward • Similarly, a forward purchase position can
commitment be extended using a sell-buy swap

39
Utility of • A bank that is oversold in a FC in the spot

Forward Swaps market but overbought in the same FC
for almost the same amount in a forward
Offsetting maturity can do a buy-sell swap to offset
overbought both positions for a cost that is lower than
doing outright transactions for offsetting
and oversold • Similarly, overbought position in one
positions for maturity and oversold position in another
different maturity can be offset using a sell-buy
swap
maturities
40
Utility of • A company borrowing in FC for 6 months

Forward Swaps has FC inflow today and outflow after 6
months. It can do a sell-buy swap (i.e., sell
Hedging both principal amount spot and buy principal +
interest 6-m forward) to remove
legs of a FC exchange rate uncertainty
borrowing or • Anyone investing in FC abroad can hedge
an investing the cash flow through a buy-sell swap for
the maturity of the investment
transaction

41
Due to capital controls, the currencies of some

emerging countries are not freely traded outside the
home country
For such currencies NDFs exist in offshore trading

locations, with only cash settlement, usually in USD
INR NDF markets have developed in Singapore, Hong

Kong, Dubai, and Bahrain
42
Illustration of NDF Settlement:

A trader goes long on INR 20 million in 2-m NDF at
USD/INR = 0.01429, and the USD/INR spot rate on
maturity is 0.01438
The trader will receive USD 1,800 in cash settlement

of the above NDF [ (0.01438 – 0.01429) x 20,000,000 ]

43
Illustration of NDF Settlement:

If a trader went long on BRL/USD 3-month NDF @
3.8180 for a notional of USD 1 million, what will be
the settlement cash flow if the settlement date spot
rate is 3.8200? (Assume settlement in USD)
(3.8200 – 3.8180) x 1,000,000 = BRL 2,000 / 3.8200 =

USD 523.56

Glsuni Mba 1820 If M2 P3 A

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Glsuni Mba 1820 If M2 P3 A

Uploaded by

Copyright:

Available Formats

GLS UNI – MBA SEM III (2018-20)

PROF. SANDEEP R. SHROFF

Spot and Forward

International Finance M2 – P3-A

IF - Spot and Forward Forex Market GLS UNI - MBA - 2018-20

IF - Spot and Forward Forex Market GLS UNI - MBA - 2018-20

FOREX market offers the following types of settlements

Cash / Ready (T+0) (same day delivery of currencies)

Forward (>T+2) (delivery beyond 2 business days)

International Finance M2 – P3-A

IF - Spot and Forward Forex Market GLS UNI - MBA - 2018-20

IF - Spot and Forward Forex Market GLS UNI - MBA - 2018-20

They are exchange rates used for spot

Typically used for settling

International Finance M2 – P3-A

IF - Spot and Forward Forex Market GLS UNI - MBA - 2018-20

For BC: (New ER/Old ER) – 1

For QC: (Old ER/New ER) – 1

Converting appreciation into depreciation,

IF - Spot and Forward Forex Market GLS UNI - MBA - 2018-20

A bank may intentionally increase or

International Finance M2 – P3-A

IF - Spot and Forward Forex Market GLS UNI - MBA - 2018-20

e.g., the current spot rate for INR/GBP = 85.7652/82

A bank desirous of A bank desirous of increasing

IF - Spot and Forward Forex Market GLS UNI - MBA - 2018-20

International Finance M2 – P3-A

IF - Spot and Forward Forex Market GLS UNI - MBA - 2018-20

Forward • Market wherein forward rates are quoted

Forward • Contract for future purchase and sale of

• Exchange rate contracted today for

IF - Spot and Forward Forex Market GLS UNI - MBA - 2018-20

Quoted for standard maturities such as 1 or 2 weeks

They help lock-in an ER for future purchase or sale of

Forward rates are expressed just like the spot rates

International Finance M2 – P3-A

IF - Spot and Forward Forex Market GLS UNI - MBA - 2018-20

The same rules regarding inverse rates and cross rates

Forward bid-offer spread increases with time to

Forward rates can quote at a premium or discount to

IF - Spot and Forward Forex Market GLS UNI - MBA - 2018-20

Forward Premium Forward Discount

Forward ER > Spot ER Forward ER < Spot ER

Base currency is appreciating, Base currency is depreciating,

e.g., INR/USD Spot = 68.7525/75 e.g., INR/USD Spot = 68.7525/75

International Finance M2 – P3-A

IF - Spot and Forward Forex Market GLS UNI - MBA - 2018-20

Forward rates are Such forward

IF - Spot and Forward Forex Market GLS UNI - MBA - 2018-20

Forward points are For spot ERs quoted to 4

International Finance M2 – P3-A

IF - Spot and Forward Forex Market GLS UNI - MBA - 2018-20

What are the What are the

IF - Spot and Forward Forex Market GLS UNI - MBA - 2018-20

As with two-way forward

International Finance M2 – P3-A

IF - Spot and Forward Forex Market GLS UNI - MBA - 2018-20

What are the bid- What are the bid-

IF - Spot and Forward Forex Market GLS UNI - MBA - 2018-20

When we wish to obtain a full

International Finance M2 – P3-A

IF - Spot and Forward Forex Market GLS UNI - MBA - 2018-20

Convert the following