Competitive quote convention for FX swaps

External question — Quantitative Finance Stack Exchange Author: sjedi Original post: https://quant.stackexchange.com/questions/79631 License: CC BY-SA 4.0 — https://creativecommons.org/licenses/by-sa/4.0/ Adaptation: HTML converted to plain text; contact email addresses removed. When rolling a maturing FX forward, the FX swap is quoted in forward points by the brokers for the far leg, but the spot for the near leg is not quoted. To get the most competitive quote, why do we just look at which has the most positive/least negative forward points? Why is the spot rate for the near leg not considered?

External answer — Quantitative Finance Stack Exchange Author: Attack68 Original post: https://quant.stackexchange.com/a/79632 License: CC BY-SA 4.0 — https://creativecommons.org/licenses/by-sa/4.0/ Adaptation: HTML converted to plain text; contact email addresses removed. For an FX swap the sensitivity of the PV of a transaction has small exposure to the spot FX rate, which is often mitigated by transactions conventions. The dominant risk quantity to which you are exposed is the forward points. In the interdealer market, when rates were close to zero and there was little difference between currencies, the notional on the LHS currency at spot and the forward date would be set as the same amount, e.g +10mm spot and -10mm forward. This can be typical on some client-dealer FX Swap transactions also since it is easier to define. When rates are higher now and there are bigger differences between different currencies' interest rates, a transaction mechanism called 'split notionals' is used on FX swaps in the interdealer market. If doing a 6m swap with rates at 2% in the LHS currency the notionals would now be set at +10mm and -10.1mm. The purpose of doing this is to minimise the residual PV exposure to the spot FX rates, and since this is very effective there is no real need to consider the spot FX rate at the time of pricing, since "anything" close to the prevailing spot FX rate will generally be considered acceptable within a tolerance of the agreed transaction. Similarly, the "2%" rate used to derive the split notionals is also not particularly scrutinised since getting an interest rate right within a 1bp or so is quite easy for developed markets and again makes little difference within a tolerance of the agreed transaction.