FX Forwards and Swaps
Price a currency forward from spot and the two currencies' money-market rates, read it as forward points and a premium or discount, mark an existing forward to market, and see the two legs of an FX swap.
Learning focus: the forward rate grows spot by the price currency's interest and shrinks it by the base currency's, so the currency with the lower interest rate trades at a forward premium.
Amount is in EUR, the base currency. If a contract is sized in USD, divide by the contract rate first.
An offsetting forward for the same date locks in the difference between today's forward rate and the contract rate, paid in USD at maturity, so it is discounted at the USD rate for the days left.
| Leg | Day | Rate | EUR to you | USD to you |
|---|---|---|---|---|
| Near (spot) | 0 | 1.085000 | 10,000,000.00 | −10,850,000.00 |
| Far (forward) | 180 | 1.095716 | −10,000,000.00 | 10,957,160.49 |
Negative amounts are paid. The EUR amounts cancel, so an FX swap is like borrowing one currency and lending the other for the term; the swap points are the interest difference between them.
With the same rates at every term, the points grow roughly in line with time: they are positive when the USD rate is above the EUR rate and negative when it is below.