1. Swaps

2. FX SWAP The Spot Purchase and Forward Sale
of Currency. The Two Transactions
are Executed
Simultaneously
and are based off the
Same Spot Rate

3. FX Swap Rates
As with a forward contract the Bank will quote a spot and a forward rate for both sides of the market
GBP/CAD
1 Month Points

4. FX SWAP RATES
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

5. EXAMPLE
Your 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 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?

7. THE SWAP CALCULATION 2
Borrowing CAD directly from the local bank will cost
3,000,000 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 outright
Today At spot of
Buy CAD 3,000, Sell GBP 1,281,886.94
1,281,886.94x.06x30/365 = 6,321.63
Forward At forward of
Sell 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 swap
Cost CAD 13,248.68
So, on financial basis, do the swap
Effective interest rate in CAD
13, x 365/30 = %
3,000,000

10. USES OF THE SWAP 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