1

The Spot Purchase and Forward Sale of Currency. The Two Transactions

are Executed Simultaneously and are based off the Same Spot Rate

2

As with a forward contract the Bank will quote a spot and a forward rate for both sides of the market

GBP/CAD 2.3378- 2.3403 1 Month Points 14 12

3

However it is only the Forward Points representing the differential in interest rates between the two currencies that will affect the swap.

The forward points to be used will be determined by the forward transaction in the Swap.

The Same Spot Rate will be used for both the purchase and sale of the currency

4

Your Canadian subsidiary tells you that it wishes to borrow 3 million Canadian dollars for one month (30 days). Their local bank will lend at 5.5% pa. Your GBP interest cost is 6% pa.

Is it cheaper for the subsidiary to borrow from you or from the bank?

5

Questions to ask 1 What will it cost in CAD? 2 In the Swap, what side will we be on in the forward? (this will determine the spot rate to use) 3 Therefore how many GBP do we need to borrow today to give CAD 3,000,000? 4 Therefore how many GBP will we have to pay back at 6.0% in the future? 5 At the forward rate, how many CAD will be

needed? 6 Is this more or less than borrowing CAD directly?

6

Borrowing CAD directly from the local bank will cost?

3,000,000 x .055 x 30/365 = 13,561.64

7

Spot GBP/CAD 2.3378 - 2.3403 30 Day Points 14 12 1 month forward outright 2.3364 - 2.3391

Today At spot of 2.3403Buy CAD 3,000,000.00 Sell GBP

1,281,886.94

1,281,886.94x.06x30/365 = 6,321.63

Forward At forward of 2.3391Sell CAD 3,013,248.68 Buy GBP

1,288,208.57

8

Borrow CAD Direct at 5.5% Cost CAD 13,561.64 Borrow CAD via the swap Cost CAD 13,248.68 So, on financial basis, do the swap Effective interest rate in CAD 13,248.68 x 365/30 = 5.37% 3,000,000

9

Can be used to invest or borrow in a foreign currency for a specified period of time without creating an fx exposure concentrate funds from a number of different currencies into one currency to obtain better

rates without creating an fx exposure offset surplus funds in one currency against

deficit in another currency for a specified period of time without creating an fx exposure

10