2 FX SWAP The Spot Purchase and Forward Sale of Currency. The Two Transactionsare ExecutedSimultaneouslyand are based off theSame Spot Rate
3 FX Swap RatesAs with a forward contract the Bank will quote a spot and a forward rate for both sides of the marketGBP/CAD1 Month Points
4 FX SWAP RATESHowever 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
5 EXAMPLEYour Canadian subsidiary tells you that it wishes to borrow 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?
6 THE SWAP CALCULATION 1 Questions to ask 1 What will it cost in CAD? 2 In the Swap, what side will we be on inthe forward? (this will determine the spotrate to use)3 Therefore how many GBP do we need to borrowtoday to give CAD 3,000,000?4 Therefore how many GBP will we have to payback 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?
7 THE SWAP CALCULATION 2Borrowing CAD directly from the local bank will cost3,000,000 x .055 x 30/365 = 13,561.64
8 THE SWAP CALCULATION 3 Spot 2.3378 - 2.3403 30 Day Points 14 12 1 month forward outrightToday At spot ofBuy CAD 3,000, Sell GBP 1,281,886.941,281,886.94x.06x30/365 = 6,321.63Forward At forward ofSell CAD 3,013, Buy GBP 1,288,208.57
9 ANSWER Borrow CAD Direct at 5.5% Cost CAD 13,561.64 Borrow CAD via the swapCost CAD 13,248.68So, on financial basis, do the swapEffective interest rate in CAD13, x 365/30 = %3,000,000
10 USES OF THE SWAP Can be used to invest or borrow in a foreign currency for aspecified period of time without creating anfx exposureconcentrate funds from a number of differentcurrencies into one currency to obtain better rates without creating an fx exposureoffset surplus funds in one currency against deficit in another currency for a specified period of time without creating an fx exposure