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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?

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    $\begingroup$ "Funds usually hedge FX risk of their long term foreign assets (eg UST) with short term FX swaps (usually maturity < 1yr)" --- worth noting this depends on whether the asset is funded or unfunded. $\endgroup$ – user42108 Mar 28 at 17:14
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    $\begingroup$ what do you mean exactly? $\endgroup$ – Student Mar 28 at 19:38
  • $\begingroup$ "what do you mean exactly?" - Do you have exposure to the notional of the instrument? $\endgroup$ – user42108 Mar 29 at 14:25
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    $\begingroup$ E.g. You buy Bunds unlevered, you have exposure to the notional. You buy Bund futures, you do not have exposure to the notional. $\endgroup$ – user42108 Mar 29 at 19:34
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    $\begingroup$ did you try to google it? investopedia seems to provide exactly what you are looking for. $\endgroup$ – Igor Pozdeev Mar 30 at 8:05
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Simple example: euro based investor wants to buy a USTreasury, currency hedged back into Euro. Investor executes the following 2 trades at t=0:

  1. purchase Treasuries for next day settle. Assume usd12mm purchase price.
  2. 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.

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  • $\begingroup$ Example above implies that after 1y the spot price is equal to the fwd price at inception of the trade. As usually this is not the case, there is some fx risk in the rollover since you are not fully hedge? $\endgroup$ – Student Mar 30 at 12:56
  • $\begingroup$ Hi you can do a customized fx swap where the initial exchange is off market. Dealers will quote that $\endgroup$ – dm63 Mar 30 at 13:31

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