Currency interest rate swap scheme. Fine-Tuning Currency Swap Auctions. Purpose of currency swaps

A currency stop is a special financial instrument used by both banks and international companies. Despite the fact that all types of swaps - currency, stock and interest - work in approximately the same way, the former have certain features.

Such an operation as a currency swap always involves the participation of two market participants who want to make an exchange in order to obtain the desired currency with the maximum benefit. To illustrate the essence of a currency swap, consider the following conditional example.

Let a certain British firm (company A) wish to enter the US market, and an American corporation (B) wish to expand the geography of its sales in the UK. Usually, loans and credits issued by banks to non-resident companies are characterized by higher interest rates than those issued to local firms. For example, company A can be given a loan in US dollars at 10% per annum, and company B can be given a loan in GBP at 9%. At the same time, the rates for local companies are much lower - 5% and 4% respectively. Firms A and B can enter into a mutually beneficial agreement, under which each organization will receive a loan in its own national currency at a local bank at better rates, and then there will be a "swap" of loans through a mechanism known as a currency swap.

Let us assume that the dollar is also exchanged for Forex market at the rate of 1.60 USD for 1.00 GBP, and each firm needs the same amount. In this case, US Firm B will receive £100 million and Company A $160 million. Of course, they have to compensate their partner, but the swap technology allows both firms to reduce their loan repayment costs by almost half.

For the sake of simplicity, the role of the swap dealer, which acts as an intermediary between the participants in the transaction, was excluded from the example. Dealer involvement will slightly increase the cost of the loan for both partners, but the costs will still be much higher if the parties do not use the swap technology. The amount of interest that the dealer adds to the cost of the loan, as a rule, is not too large and is in the range of ten basis points.

It should also be noted that such a type of such operation as a currency-interest swap. In this case, the parties exchange interest payments aimed at repaying foreign currency loans.

We note a few key points, thanks to which the swap differs from other types of similar transactions.

Unlike an income-based swap and an interest-bearing simple swap, a currency swap involves a preliminary and then a final exchange of a predetermined amount of credit obligations. In our example, the companies made an exchange of $160 million for £100 million at the start of the transaction, and at the end of the contract they have to make the final exchange - the amounts are returned to the relevant parties. At this point, both partners are at risk, because the original exchange rate of the dollar and the pound (1.60:1) has probably already changed.

In addition, most swap transactions are characterized by netting. This term means the netting of amounts of money. In a swap transaction, for example, the income from an index can be exchanged for income from a certain security. The income of one participant in the transaction is netted against the income of the other participant on a prearranged specific date, and only one payment is made. At the same time, those associated with currency swaps are not subject to netting. Both partners undertake to make the respective payments on the agreed dates.

Thus, a currency swap is a tool that achieves two main goals. On the one hand, they reduce the cost of obtaining loans in (as in the example above), and on the other hand, they allow you to hedge the risks associated with sharp changes in the exchange rate in the Forex market.

Hi all.

With Forex currency swap I met pretty funny. Somehow I noticed that in the morning my balance changes slightly. Naturally, I immediately go to technical support. Gave them a tantrum on the topic: Someone makes deals for me while I sleep. But everything turned out to be wrong.

The whole point is that when buying or selling currency, we actually do not own them. And in order to sell for example Euro/Aud we borrow Euros and sell Australian Dollars. As we all already know, different countries have different discount rates.

Take into account the rates of world Central Banks, as of 10.04.2017

And so it turns out that when we move our position through the night. We need to resolve two important points.

1. All transactions in the forex market fall under the SPOT category, which implies real delivery the next day. Since our goal is to make money on a change in the exchange rate, we don’t need at all that Australian dollars bet on us the next day.
2. The minimum loan term is one day, after which we must pay interest in the currency that we borrowed (Euro) and we must accrue interest on the currency in which we invested (Australian dollar). According to the difference in discount rates.

The settlement of these issues is carried out with the help of a SWAP (SWAP) transaction or simply transferring a position through the night, it is also called an Overnight transaction. As a rule, all this is organized by one counterparty, the Bank or Broker in my case, Alfa Forex.

I’ll write right away, the Forex Currency Swap is charged according to the generally accepted scheme and the broker charges SWAPs not depending on their Wishlist, but taking into account the difference in interest rates, adding to them a small commission for the operation.

SWAP table

If you do not want to worry about the calculation, then you can simply use the SWAP table. AT Alpha Forex it looks like this:

Swaps on major currency pairs

Currency SWAP calculation

If you have an academic interest and it is important for you to know how the forex swap is calculated? - there is the following formula:

SWAP=(a*(b+c) / 100) *d/365

1. Leveraged contract
2. The difference between rates
3. broker commission
4. Current price

Currency swap examples

As an example of swap accrual in Alpha Forex I will give a screenshot from the terminal by open positions. In practice, it looks like this:

This is what swaps look like in the terminal

It should be taken into account that a triple swap is charged from Wednesday to Thursday, and for ruble instruments from Thursday to Friday.

There are various swap trading strategies, one of them is .

Types of SWAPs

Above, we have considered the Forex Currency Swap carried out by one counterparty. It is also called pure swap. In addition to him, there are a great many of them. But it is of interest forward swap. For example, let's take a pair of Usd/Rur and a September forward on it Sep/Rur.

• Usd/Rur — traded at 57.25 (April 8, 2017)
• Sep/Rur – at a price of 59.25

The difference between them is two rubles due to the fact that in the price of the March forward swap is already included in the price. This creates interesting hedging opportunities. But more on that in the next article.

Currency swap - English Currency Swap, is a combination of two opposite currency exchange transactions for the same amount with different value dates. With regard to a swap, the date of execution of a closer transaction is called the value date, and the date of execution of a more distant reverse transaction is the swap end date ( English Maturity).

If the nearest currency exchange transaction is a purchase of a currency, and a more distant one is a sale of a currency, such a swap is called “bought/sold” ( English Buy and Sell Swap). If, at the beginning, a transaction is made to sell a currency, and the reverse transaction is a purchase of a currency, this swap will be called “sold/bought” ( English Sell ​​and Buy Swap).

As a rule, a currency swap is carried out with one counterparty, that is, both currency exchange operations are carried out with the same bank. This is the so-called net swap ( English Pure Swap). However, it is allowed to call a swap a combination of two opposite currency exchange transactions with different value dates for the same amount, concluded with different banks - this is a constructed swap ( English Engineered Swap).

By maturity, currency swaps can be divided into three types:

• standard swaps (from spot) - here the nearest value date is spot, the farthest one is on forward terms;
• short one-day swaps (before spot) - here both trade dates included in the swap fall on the dates from spot. For example, one deal goes in the spot-tom format, and the second on the second business day after the deal is closed (spot);
• Forward swaps (after spot) - they are characterized by combinations of two outright transactions, when a transaction that is closer in term is concluded on forward terms (the value date is later than spot), and the reverse transaction is concluded on the terms of a later forward.

Currency swaps, despite the fact that in form they represent foreign exchange transactions, in terms of their content, they relate to money market operations.

Consider an example of a currency swap.

The American company has a subsidiary in Germany. For the implementation of a 5-year investment project she needs 30 million euros. The exchange rate on the spot market is EUR/USD 1.3350. The company has the option to issue US$40.05 million worth of bonds in the US at a fixed interest rate of 8%.

An alternative would be to issue Euro-denominated bonds with a fixed rate of 6% +1% (risk premium).

Suppose there is a company in Germany with a subsidiary in the United States that needs a similar amount of investment. It can either issue €30m bonds at a fixed rate of 6% or $40.05m at 8%+1% (risk premium) in the US.

In any case, both companies face significant foreign exchange risk, which will affect interest payments throughout the life of the bonds, as well as the principal amount of the loan after 5 years.

In this case, the bank can arrange a currency swap for these two companies, receiving a commission for this. In this case, the bank closes long currency buying positions for both companies and reduces interest costs for both parties. This is due to the fact that each company borrows in local currency at a lower interest rate (no risk premium).

Thus, each company gains a relative advantage.

The principal amount of the loan will be transferred through the bank:

• $40.05 million by a US company to a subsidiary of a German company;
• 30 million euros by a German company a subsidiary of an American company.

Interest payments will be repaid as follows:

• the subsidiary structure of the American company annually transfers 30 * 0.06 = 1.8 million Euros to the parent company, which transfers these funds to the bank, which, in turn, transfers them to the German company to repay the loan in Euros;
• a subsidiary of a German company annually transfers 40.05 * 0.08 = 3.204 million US dollars to the parent company, which transfers these funds to the bank, which transfers them to the American company to repay the loan in US dollars.

Thus, a currency swap fixes the exchange rate three times:

1. The principal amounts of loans are exchanged at the spot rate of EUR/USD 1.3350.

2. The exchange rate for annual interest payments (years 1 to 4) will be fixed at EUR/USD 1.7800 (USD 3.204 million/EUR 1.8 million).

3. The exchange rate for repayment of interest for the fifth year and repayment of the principal amount of the loan will be EUR/USD 1.3602:

During the execution of the currency swap transaction, the parties fixed the exchange rate, which made it possible to avoid currency risks.

With regard to a swap, the date of execution of a closer transaction is called the value date, and the date of execution of a more distant reverse transaction is the swap end date (maturity). Most of currency swap transactions are concluded for a period of up to 1 year.

If the conversion transaction closest in date is a purchase of a currency (usually the base one), and the more distant one is a sale of a currency, such a swap is called "bought/sold"(English) buy and sell swap). If, at the beginning, a transaction is carried out to sell the currency, and the reverse transaction is the purchase of the currency, this swap will be called "sold/bought"(sell and buy swap).

As a rule, a currency swap transaction is carried out with one counterparty, that is, both conversion operations are carried out with the same bank. This so-called net swap(pure swap). However, it is allowed to call a swap a combination of two opposite conversion transactions with different value dates for the same amount, concluded with different banks - this constructed swap(engineered swap).

Swap line

Swap types

By maturity, currency swaps can be divided into three types:

• Standard Swaps(from spot) - here the nearest value date is spot , the farthest value date is forward ;
• Short One Day Swaps(before spot) - here both dates of the trades included in the Swap deal fall on the dates before the spot. For example, for a Tom/Next deal, the first deal is settled on the value date Tom (Tomorrow), and the second deal is settled on the next (Next) business day (the second business day after the deal is made - spot).
• Forward swaps(after spot) - they are characterized by combinations of two outright transactions, when a transaction that is closer in terms of time is concluded on forward terms (the value date is later than spot), and the reverse transaction is concluded on terms of a later forward.

Currency swaps, despite the fact that in form they are conversion operations, in terms of their content they are related to money market operations (MM operations).

financial mathematics

The swap price is the difference between the rates of the legs of the swap - the rates of conversion transactions that form the swap.

A simplified swap can be presented in the form of two opposite transactions (for example, a deposit and a loan), which are exchanged by the parties in a transaction at agreed interest rates. Since the interest rates on deposits and loans are not equal, then - if the equivalents of the amounts on the first leg of the swap are equal and the terms of the conditional deposit transactions are equal - the interest payments will not be equivalent. It is the difference between them that determines the price of the swap.

The swap price is calculated based on:

• Differential of interest rates by currencies of conversion transactions,
• Swap maturity - the difference between the start and end dates of the swap,
• The rate for the first leg of the swap - the rate for the first conversion deal.

Swap Price Calculation

Swap difference calculation based on interest rates and exchange rates:

Swap difference where let

1. swap dates and trade term (in years):
   • 12/01/2008 and
   • 01.02.2009
   • Number of days (in years)
     1. USD = 62 / 360 = 0.172222222 (Act / 360)
     2. RUB = 31 / 366 + 31 / 365 = 0.16963096 (Act / Act)
        For a detailed description of the Day Count Convention, see WIKI:EN at Day Count Convention .
2. rates and spot rate
   • USD: 2 / 3
   • RUB: 12 ​​/ 14
   • USD/RUB: 29.0000 / 29.0500

The swap difference is calculated in the same way: or in paragraphs -

Thus, the Bank, rounding up, will quote the swap as follows: , where

Swap Interest Rate Calculation

The interest rate for the price currency is known.

A cross-currency swap involves the exchange of payments in different currencies on certain dates in the future. Unlike the standard (interest rate swap), counterparties exchange face value at the spot rate on the date of the transaction and return the received amounts when the transaction is closed. The interest payments of both parties can be tied to both a floating rate and a fixed rate, depending on the agreement of the counterparties.

(For more information on the pricing of standard interest rate swaps, see the article)

Let's consider the mechanism of operation of a currency interest rate swap using an example. Two companies - American Americorp with a high credit rating and British Britcorp with a lower credit rating - want to borrow at a fixed rate. Americorp is seeking a loan of £100 million (GBP) and interest in pounds to finance the unit's operations in the UK. And Britcorp is interested in $160 million in dollar funding to support its business growth in North America.

Spot rate: 1 GBP = 1.60 USD

Market interest rates are indicated in the table.

Table. Comparative cost of funding

For Americorp, the cost of funding is significantly lower in both USD and GBP due to its high credit rating. However, comparative advantage most significant in dollars, as the company's brand is more recognizable in North America than anywhere else in the world. Thus, Americorp is raising $160 million at 3% per annum for five years (annual interest payment of $4.8 million). Britcorp is taking out a loan of £100 million at 4.75% per annum, also for five years (annual payment of £4.75 million). Both companies will then agree a cross-currency interest rate swap contract with the trader on the following terms:

Swap with Americorp. The trader receives the $160 million nominal Americorp has raised in return for the £100 million the company needs to maintain its operations in the UK. The counterparties will exchange face value in the opposite direction after five years at the exchange rate at the time of the transaction, i.e. 1 GBP = 1.60 USD. The trader is required to pay Americorp 3% of $160 million each year for five years. While Americorp will pay 3.75% per annum on £100m.

Swap with Britcorp. The trader receives 100 million pounds in return for $160 million. The reverse exchange of face value will occur five years after the expiration of the contract. The trader is obliged to pay Britcorp 4.75% per annum on the received face value of 100 million pounds, i.e. annual payments will amount to 4.75 million pounds. While Britcorp will pay 4.35% per annum on $160 million over five years.

Pure price lending for companies

The figure depicts annual payments on bonds and swaps. Americorp's net loan value is £3.75m or 3.75% per annum of £100m face value. Consequently, Americorp was able to save 25 basis points compared to the pound sterling rate in the table if the company had borrowed immediately in sterling for foreign market. The net borrowing value for Britcorp is $6.96m of $160m par or 4.35% per annum. Thus, Britcorp saves 15 basis points.

Trader's position

Since the trader acts as a conductor between the two companies, the exchange of face value at the beginning of the transaction and after the expiration of the contract does not affect the position of the trader. The trader's profit depends on the amount of annual payments under the swap contract:

$6.96 million – $4.8 million = $2.16 million

GBP 3.75 million – GBP 4.75 million = – GBP 1 million

Note that the trader is exposed to currency risk, as he pays in pounds sterling and receives payments in US dollars. In order to completely get rid of this risk, a trader can enter into a series of forward contracts to buy pounds sterling and sell US dollars.

Denomination exchange

It may seem strange to some that counterparties exchange face value at the same rate at the time of the conclusion of the transaction and at the time of its closing. Why is the exchange rate for the face value exchange to close the deal not equal to the 5-year forward rate?

The forward rate is calculated from the spot value and the difference between the interest rates of the two currencies. A cross-currency interest rate swap takes into account the difference between the interest rates of the two currencies, which is reflected in the amount of annual interest payments. This pricing structure suits Americorp and Britcorp as they need to repay $160m and £100m after five years. It should be noted that the exchange of par increases the credit risk of the transaction, which is managed not by the currency interest rate swap traders, but by the department's traders with the help of CDS.

CVA traders should understand the pricing of credit default swaps. (You can read more about the practical side of credit default swaps in)