Is the correct side of the dealer quote (bid or offer) for the all-in forward rate based on the appropriate side chosen to determine the forward points on the forward leg of the FX swap? In other words, does the offsetting spot transaction default to the same side of the quote used in the forward leg of the swap? Thanks!
Could anyone provide some insight here? Thanks!
Wont that depend on which side of the transaction the dealer is transacting in? It will not be on the same side.
Let’s assume you are long the GBP in the GBP/EUR. In order to hedge, you would sell forward the GBP (or buy the EUR). Given the quote convention, you would buy, or use the OFFER side of the quote. Now, to roll this forward, you would need to buy GBP (or sell EUR) at the spot market price and then enter a new forward contract selling forward the GBP (or buying the EUR). Given the fact that the forward leg of the contract would calculate the forward points at the OFFER price, would the offsetting spot transaction also defer to the OFFER side of the quote when calculating the all-in forward contract rate necessary to roll the transaction forward?
Thanks!
No.
If it’s a matched swap, you would use the midpoint of the forward bid/ask points. If it’s a mismatched swap, the spot transaction would use the forward bid points and the forward transaction would use the forward ask points.
Thank you! This was my understanding as well. However, in Reading 19, the Jin Ling example (mismatched swap) confuses me. The example is slightly different as the forward leg uses the bid price. The text states, “that the spot leg of the swap also uses the bid price because Yang is selling an amount greater than EUR 8 million forward and the all in forward rate of the swap is already using the bid side of the market. To pick up the net increase in forward EUR sales, dealer would price swap so Yang also has to use bid side of spot quote for spot transaction used to settle maturing forward contract.” In this case, it would seem to me that Yang would be using the offer side for the spot transaction because Yang is purchasing the EUR long.
Any ideas?
Anyone have thoughts on this example from Reading 19? Thanks!
Spot Sold EUR 8 Million Forward
So in Forward leg he needs to BUY EUR 8 Million - so BID Side … is right
================
cpk123 - I understand the need to use the BID side for the forward leg. However, why is the spot quote utilizing the BID side of the quote as well?
If you reread §2.3 on mismatched FX swaps (as I just did, having not read it in a couple of years), you’ll see that the same rate (bid or ask) is used for both the spot transaction and the forward transaction. Which rate is used depends on whether the net of the two transactions is a sale or a purchase of the base currency: for a net sale, you use the bid rate; for a net purchase, you use the ask rate.
In the example you site (Jiao Yang, by the way; not Jin Ling), the net transaction is a sale of EUR (the base currency in the quotes), so you use the bid rate for both.
1 Like
Thank you, S2000magician! Your explanation has cleared it up for me. Much appreciated! (…and apologies for the typo on the name of the example.)
You’re quite welcome.
I did hunt around a little bit for the Jin Ling example. Fortunately, cpk mentioned the EUR8,000,000, so I finally found it.
1 Like