Pricing of swaps
Pricing of swaps
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user1274193 · External communityPost link
External question — Quantitative Finance Stack Exchange
Author: user1274193
Original post: https://quant.stackexchange.com/questions/24901
License: CC BY-SA 3.0 — https://creativecommons.org/licenses/by-sa/3.0/
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I have a (hopefully) elementary question about forex swaps.
Most feeds will have a near and a far leg (or more legs for more exotic swaps).
I appreciate that "buying the swap" involves locking in multiple transactions at different points in time, with different rates.
Is there a convention for representing these multiple prices as a single price? After all, spreads/strategies are presented with a single price to buy or sell, based on its legs.
Is it something like (near price - far price), or the inverse? If so, how does this work for swaps with six legs containing different amounts at each leg?
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rupweb · External communityPost link
External answer — Quantitative Finance Stack Exchange
Author: rupweb
Original post: https://quant.stackexchange.com/a/24903
License: CC BY-SA 3.0 — https://creativecommons.org/licenses/by-sa/3.0/
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From my
FX trainer
the swap points reflect the differential in interest rates between the 2 currencies. If the trade was on the RHS the market maker would be giving up the currency with the higher interest rate (points my favour) and receiving the currency with the lower interest rate. The swap provides both parties with an accurate cost of switching such cash flows.
Here, you're trying to take a differential across 6 value dates. So provided everything is the same way around I don't see why you can't do as you've said and subtract any number of differentials into 1 aggregate, and get a total cost to switch all the cash flows.
However, from
here
there is something called a single spot portfolio (SSP) being "an FX deal involving one or more legs in a single currency pair on any combination of value dates. The dealt currency should be the same for all legs. SSP price quotes typically have four components: a spot rate, the FX points for each of the non-spot value dates, and the all-in rates for each of the non-spot value dates."
And again "A foreign exchange transaction or "deal" involving multiple value dates for a single currency pair. The Provider quotes a single spot rate (hence the name) together with FX points for each value date."
So in a professional implementation of what you're talking about, as a client you'd want to see each differential between spot and the far date(s). So you can see an accurate cost of each cash flow in the deal, I guess. Perhaps compare these costs with other providers.
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Quoted from Forex.com.bd-Editorial External answer — Quantitative Finance Stack Exchange Author: rupweb Source score (net votes, not local likes): 2 Original post: https://quant.stackexchange.com/a/24903 License: CC BY-SA 3.0 — https://creativecommons.org/licenses/by-sa/3.0/ Adaptation: HTML converted to plain text; contact email addresses removed. From my FX trainer the swap points reflect the differential in interest rates between the 2 currencies. If the trade was on the RHS the market maker would be giving up the currency with the higher interest rate (points my favour) and receiving the currency with the lower interest rate. The swap provides both parties with an accurate cost of switching such cash flows. Here, you're trying to take a differential across 6 value dates. So provided everything is the same way around I don't see why you can't do as you've said and subtract any number of differentials into 1 aggregate, and get a total cost to switch all the cash flows. However, from here there is something called a single spot portfolio (SSP) being "an FX deal involving one or more legs in a single currency pair on any combination of value dates. The dealt currency should be the same for all legs. SSP price quotes typically have four components: a spot rate, the FX points for each of the non-spot value dates, and the all-in rates for each of the non-spot value dates." And again "A foreign exchange transaction or "deal" involving multiple value dates for a single currency pair. The Provider quotes a single spot rate (hence the name) together with FX points for each value date." So in a professional implementation of what you're talking about, as a client you'd want to see each differential between spot and the far date(s). So you can see an accurate cost of each cash flow in the deal, I guess. Perhaps compare these costs with other providers.
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