Matched/Mismatched FX Swaps

CFA Level III Derivatives
#1

Want to make sure I have the correct processes for rolling position forward for FX swaps

  • Matched FX swap: Use mid-market spot rate to close out current contract and subsequently open new position using mid-market rate +/- forward points.

  • Mismatched FX swap: Same process, but when new forward position will be larger than the one being closed out (Net outflow of funds) use the bid side +/- forward points. When new forward position will be smaller (Net inflow of funds) use ask side +/- forward points.

Are these correct?

2 Likes
#2

You’re correct about the matched FX swap.

Unfortunately, the curriculum is ambiguous about the procedure for mismatched FX swaps. However, in their blue box example, they say that you determine whether the net forward/spot transaction is a purchase or a sale, then price both legs using the spot rate and points appropriate for that net transaction:

  • If the net transaction is a purchase, use the ask rate for the spot transaction. and the ask rate plus the ask forward points for the forward transaction

  • If the net transaction is a sale, use the bid rate for the spot transaction, and the bid rate plus the bid forward points for the forward transaction

3 Likes
#3

Thanks!

#4

My pleasure.

#5

but whats the logic of it? I m trying to understand the meaning, but I haven’t quite got it