Currency swap vs forward
There is something i can’t understand in this chapter of derivatives about currency swap… please find below a simple example.
A company will receive 4mCAD every 6 months for the next 2 years (4 payments).
The current exchange rate is USD/CAD 0.78
swap rate USD : 4%
swap rate CAD : 3%
The company enters a currency swap in which it will receive 2 340 000 USD (pay 4 000 000 CAD) each semester, computation as below :
4 000 000 / 0.04 = 200 000 000 CAD converted spot in 156 000 000 USD.
156 000 000 * 0.03 * 180/360 = 2 340 000 USD
The company convert its CAD in USD at a 0.58 USD exchange rate.
However, working as a FX Sale in a bank, if a client come to me saying that he will receive 4 000 000 CAD each semester, i will propose him a simple forward contract with an exchange rate computed as 0.78 * USA rate / CAD Rate = 0.7850.
Thus my client will pay 4 000 000 CAD and will receive around 3 140 000 USD each semester, which is a much better deal than the currency swap…
Why i dont understand ?
Thank you very much
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