When I am reading materials in swap point calculation for FX Tom/Next Rollover, I am confused with the market interest rate bid/ask.

Using an example: I traded on Aug 7, 2019 Short 5,000,000 USDJPY, the closing price (spot rate) of the position is 119.94000

Market Interest Rates +-----+------------+-------------+ | | BID | ASK | +---+--------------+-------------+ | JPY | -0.11% | -0.09% | | USD | 0.100% | 0.130% | +-----+------------+-------------+ What does the above interest rates mean with the bid/ask? Especially when this is applied to the formula below:

$Bid Side Swap Point = Spot Rate \cdot (\dfrac{1+VCBR\cdot\dfrac{SwapDays}{360 or 365}}{1+BCLR\cdot\dfrac{SwapDays}{360 or 365}}-1)$ $Ask Side Swap Point = Spot Rate \cdot (\dfrac{1+VCLR\cdot\dfrac{SwapDays}{360 or 365}}{1+BCBR\cdot\dfrac{SwapDays}{360 or 365}}-1)$

$VCBR = Value Currency Borrow Rate$

$VCLR = Value Currency Lend Rate$

$BCBR = Base Currency Borrow Rate$

$BCLR = Base Currency Lend Rate$

In this case, we are shorting USDJPY, which means we hold JPY and sell USD, so does this mean, we are borrowing JPY and lending out USD? The calculation result shows:

$Bid Side Swap Point = Spot Rate \cdot (\dfrac{1+JPY Int. Bid\cdot\dfrac{1 SwapDay}{360}}{1+USD Int. Ask\cdot\dfrac{1 SwapDay}{360}}-1)$

$Bid Side Swap Point = 119.9400 \cdot (\dfrac{1+(-0.11%)\cdot\dfrac{1}{360}}{1+0.130%\cdot\dfrac{1}{360}}-1) = -0.0008$

I am confused why we are using the JPY interest rate BID -0.11% and USD interest rate ASK 0.130%. Is there any reason or logic? Why BID interest is the one used for the currency we long, and ASK interest is the one used for the currency we short?

Also, when broker applies client mark-up to the Market Interest Rates table, for instance a client mark-up of 0.0045 is applied, then the interest rate table becomes: +-----+------------+-------------+ | | BID | ASK | +---+--------------+-------------+ | JPY | -0.56% | -0.36% | | USD | -0.350% | 0.580% | +-----+------------+-------------+ The only thing I could figure out is that on the BID side, we are using the following formula: JPY MAX(-0.11% - 0.0045, 0)=-0.56%' and USD 'MAX(0.100% - 0.0045, 0)=-0.350% and on the ASK side we are using: JPY MAX(-0.09% + 0.0045, 0)=-0.36%' and USD 'MAX(0.130% - 0.0045, 0)=0.580%

Is there any reason or logic when a broker applies client mark-up to increase the spread of bid/ask? Why we are using these formulas? In this sense, BID for JPY is the interest rate that the position holder pays for holding it? Or it is the ASK?


1 Answer 1


It boils down to what the quote represents. Let's ignore the swap points for now, and analyse what the bid forward price represent - the price at which the market maker buys the base currency forward. So the bid price will result in the market maker receiving the dollars and paying the yen at the far date.

How would the market maker hedge this position? It is receiving dollars at the far date, so if it borrows dollars today, then it can repay the loan with the receipt of the forward. And it will be paying yen at the far date, so to make sure you have the yen, you deposit/lend yen today.

You borrow at the higher rate, the ask rate, because you are hitting someone else quotes whose quotes will be structured to ensure they lend expensive and borrow cheap. And analogously you lend yen at the bid rate. So in summary you borrow dollar at ask and lend yen at bid.

That's for the forward. Remember FX swaps are just the forward points, but their economics is mainly the economics of lending and borrowing with little or none FX spot risk. And if you want to make money from lending/borrowing, you widen the spread. Pay lower rate and charge higher rate.

Hope this helps. Here is a video that explains the FX forward points etc (I contributed to the video). The derivation of the formula starts at 3:00.



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