So if you have a mismatched swap will you always use either the bid or ask for both legs of the swap or can there be a situation when the spot legs is ask and forward leg bid? And when what would make that happen? I keep thinking this rolling forwards to hedge topic is too confusing for the test which is scaring me into thinking it will be on it.
For a matched swap, use the mid-point.
for the mismatched swap, use the bid/ask that corresponds to his original intent. if he was long, use the ask. If he was short then use the bid.
I dont see why this couldnt be a 4-5 point writei-n question in the AM, or a single multiple choice question on the PM.
They can ask you
- They can give an example trade and ask if the trader be using the bid, the ask or the midpoint
- They can provide a situation where the asset grows or stays the same, and the trader wants to continue to hedge for an additional month. If its called a mismatched or matched
- They can ask you to calculate something