5.-6. fra and fx swaps international financial services i karel bruna
TRANSCRIPT
5.-6. FRA and FX swaps
International Financial Services I
Karel Bruna
Main Business Problems(FRA and FX swaps)
• Strategy of management of single and multi-currency liquidity position in bank/MNC
• Main sources of risk involved in multi-currency cash flow
• FX swaps as the hedging instrument against FX
• FRA as the hedging instrument against interest rate risk
Main Characteristics of FRA
Maturity: 1Mx3M, 3Mx6M, 6Mx9M, 9Mx12M, odd dates
Price: bid/ask FRA rate
Currencies: those with existed interbank money markets
Amount: minimum defined by the market maker
Purpose of trading: management of single-currency liquidity
hedging of interest rate exposure
Forward Rate AgreementPricing and quotation, cash settlement
1 + IRD,LONG(tLONG/360) 360FRA rateBID = (---------------------------------- - 1) ------
1 + IRL,SHORT(tSHORT/360) tFRA
1 + IRL,LONG(tLONG/360) 360FRA rateASK = (--------------------------------- - 1) ------
1 + IRD,SHORT(tSHORT/360) tFRA
notional value(IR – FRA rate)(tFRA/360)cash settlement = ------------------------------------------------------
1 + IR(tFRA/360)
Forward Rate AgreementHedging against interest rate risk
• cash shortage situation - risk of future rise of interest rates in money market
company buys FRA contract at FRA rateASK
company obtains compensation payment in case SR > FRA rate
company pays compensation payment in case SR < FRA rate
• cash excess situation – risk of future decline of interest rates in money market
company sells FRA contract at FRA rateBID
company obtains compensation payment in case SR < FRA rate
company pays compensation payment in case SR > FRA rate
Main Characteristics of FX Swaps
Maturity: short dates, 1M, 2M, 3M, 6M, 9M, 12M, odd dates
Price: bid/ask forward (swap) points
Currency pairs: as in case of forward contracts
Amount: minimum defined by the market maker
Purpose of trading: management of multi-currency liquidity
hedging of FX exposure
Outright forwards vs. FX Swaps
outright forwards forward value date USD FRASK
CZK
FX swaps second leg value date USD SRMID+(-) swap pointsASK
CZKUSD
first leg value date CZK SRMID
Bank Client
Dealer 1 Dealer 2
FX Swaps
FX Swap Transactions 1st Leg Value Date 2nd Leg Value Date
Spot/forwardFixed Period spot
1, 2, 3, 6, and 12 months forward value date
Broken (Odd)Dates
spotany day between two fixed
forward value dates
Forward/forwardFixed Period
1, 2, 3 and 6 months forward value date
2, 3, 6, and 12 monthsforward value date
Broken (Odd)Dates
any day between two fixed forward value dates
any day between two fixed forward value dates
Short Dates
O/N Overnight today first business day after today
T/N Tomorrow-next
(Tom-next)
first business day after today
second business day after today (spot value date)
S/N Spot-next
spot first business day after spot
S/W Spot-1 week
spot 1 week after spot