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5.-6. FRA and FX swaps

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

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5.-6. FRA and FX swaps

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  1. 5.-6. FRA and FX swaps International Financial Services I Karel Bruna

  2. 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

  3. 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

  4. Forward Rate AgreementPricing and quotation, cash settlement 1 + IRD,LONG(tLONG/360) 360 FRA rateBID = (---------------------------------- - 1)------ 1 + IRL,SHORT(tSHORT/360) tFRA 1 + IRL,LONG(tLONG/360) 360 FRA rateASK = (--------------------------------- - 1)------1 + IRD,SHORT(tSHORT/360) tFRA notional value(IR – FRA rate)(tFRA/360) cash settlement = ------------------------------------------------------ 1 + IR(tFRA/360)

  5. 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

  6. 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

  7. Bank Client Dealer 1 Dealer 2 Outright forwards vs. FX Swaps outright forwards forward value date USD FRASK CZK FX swaps second leg value date USD SRMID+(-) swap pointsASK CZK USD first leg value date CZK SRMID

  8. FX Swaps

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