I am trying to get the mechanic of the swap rollover. Funds usually hedge FX risk of their long term foreign assets (eg UST) with short term FX swaps (usually maturity < 1yr), by rolling over fx swaps during the life of the trade. Can you show with a numerical example how the process works?
Simple example: euro based investor wants to buy a USTreasury, currency hedged back into Euro. Investor executes the following 2 trades at t=0:
- purchase Treasuries for next day settle. Assume usd12mm purchase price.
- execute fx swap with cashflows at t=0 : receive usd12mm/pay €10mm and cashflow at t=1yr : pay usd12.0mm/ Rec €9.9mm. (I used spot =1.20 and forward =1.21).
In 1yr, execute the following fx swap : Rec usd12mm/ pay €9.9mm for spot , pay usd12mm/ rec €9.8mm for one year forward. Etc.