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Suppose a big company A holds 10 Million USD at T+0, and A knows that it will pay 9.9 Million CHF to buy a bond at T+1, why would company A be willing to enter a currency swap to buy CHF and sell USD at T+0, and then sell CHF and buy USD at T+1? Does this involve a third party financial intermediary and another counterparty? Is this used for FX exchange risk? Is company now borrowing 10 Million USD to do the currency swap or using the 10 Million USD on its hand to do the swap? Can someone offer me a numerical example to show the mechanism of such overnight or T+2 currency swap?

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This would be a trade for Company A to earn the FX Carry.

Assuming the CHF denominated bond is a 0 Coupon discount bond with a face value of 10MM CHF, is purchased at t and settles t+1.

The company will buy the bond and then do the following FX Swap:

1) Leg 1: Buy 10MM USD worth of CHF for quick settlement on t+1 (normal settlement of CHF is t+2); In other words, they will sell 10MM USD and receive 9.9MM CHF (Spot USDCHF is .99). They will have sold 10MM USD and will no longer have it on t+1. The 9.9MM CHF will be used to purchase the CHF denominated bond.

2) Leg 2: Sell 10MM CHF forward at the maturity date of the bond. On the maturity date they will receive USD. (example: say 30 day USDCHF forward is bid at .985, they will receive 10.152284MM USD at maturity).

The company will then earn 10.152284MM - 10MM = 0.155584MM USD over the 30 day investment.

This will involve a 3rd party, which will either broker your FX Swap or be the counterparty to the FX Swap itself.

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  • $\begingroup$ Hi AIRacoon, I am thinking if this currency swap is done using the spot fx rate for USDCHF in the first leg, why would company do swap instead of using spot exchange rate? Is it because of the second leg on forward rate?Thank you very much! $\endgroup$ – commentallez-vous Nov 7 '19 at 5:28
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    $\begingroup$ The first leg of the fx swap is a spot trade. The second leg of of the fx swap is a forward trade. The combination of the two is a fx swap. If you didn’t do the second leg of the swap, you would be exposed to currency risk. $\endgroup$ – AlRacoon Nov 7 '19 at 7:07
  • $\begingroup$ I'm not sure I understand how you can sell a future for 10mm Ch when you got 9.9MM only from previous trade. Do we assume CH is gaining interests over the 30 days period ? $\endgroup$ – Mayeul sgc Nov 7 '19 at 8:52
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    $\begingroup$ Yes. I assumed you bought a 0 coupon bond at a discount. You paid 9.9mm CHF for a bond that will be worth 10mm in 1 month at maturity $\endgroup$ – AlRacoon Nov 7 '19 at 9:58

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