IOE Tradeportal

Swapping Maturing Dates

Where the payment date and cashflow is uncertain, it may be easier to hedge the FX cashflow through the Forward FX market by asking the bank to swap the maturity dates, i.e. adjust the settlement dates of the hedge by means of a short 'Swap' contract.

All that is involved is that the original Spot Rate is adjusted by the difference in the original forward premium (or discount) and the new forward premium (or discount).

For example, if payment is to be made earlier than originally expected, the foreign currency required by the buyer to make the payment may be bought on the Spot market then sold Forward for the same value date as the original forward purchase.

On the other hand, if the payment is to be made later, the foreign currency proceeds of the original Forward FX contract should be sold Spot and bought Forward for the revised payment date.

The benefits of using Swap Forward FX contracts as opposed to the alternative of Spot purchase and deposit are:

(a) avoids the significant 'spread' cost on deposits. The cost of the rollover is reduced as only one
'composite' Spread is involved.

(b) avoids inflating the gross borrowing on the balance sheet

Swap rates are stated in terms of points of discount or premium from the Spot Rate. For example if 3-month forward US Dollar was $US1.65/£ and the Spot Rate was $US1.60/£ then the forward discount on the US Dollar would be $US0.0500, known on the FX market as 500 points.