1. International Financial Services I Karel Bruna
5.-6. FRA and FX swaps
International Financial Services I
Karel Bruna

2. Main Business Problems (FRA and FX swaps)
Strategy of management of single and multi-currency liquidity position in bank/MNC
Main sources of risk involved in multi-currency cash flow
FX swaps as the hedging instrument against FX
FRA as the hedging instrument against interest rate risk

3. Main Characteristics of FRA
Maturity: 1Mx3M, 3Mx6M, 6Mx9M, 9Mx12M, odd dates
Price: bid/ask FRA rate
Currencies: those with existed interbank money markets
Amount: minimum defined by the market maker
Purpose of trading: management of single-currency liquidity
hedging of interest rate exposure

4. Forward Rate Agreement Pricing and quotation, cash settlement
1 + IRD,LONG(tLONG/360)
FRA rateBID = ( )
1 + IRL,SHORT(tSHORT/360) tFRA
1 + IRL,LONG(tLONG/360)
FRA rateASK = ( ) IRD,SHORT(tSHORT/360) tFRA
notional value(IR – FRA rate)(tFRA/360)
cash settlement =
1 + IR(tFRA/360)

5. Forward Rate Agreement Hedging against interest rate risk
cash shortage situation - risk of future rise of interest rates in money market
company buys FRA contract at FRA rateASK
company obtains compensation payment in case SR > FRA rate
company pays compensation payment in case SR < FRA rate
cash excess situation – risk of future decline of interest rates in money market
company sells FRA contract at FRA rateBID
company obtains compensation payment in case SR < FRA rate
company pays compensation payment in case SR > FRA rate

6. Main Characteristics of FX Swaps
Maturity: short dates, 1M, 2M, 3M, 6M, 9M, 12M, odd dates
Price: bid/ask forward (swap) points
Currency pairs: as in case of forward contracts
Amount: minimum defined by the market maker
Purpose of trading: management of multi-currency liquidity
hedging of FX exposure

7. Outright forwards vs. FX Swaps
forward value date USD FRASK
CZK
FX swaps
second leg value date USD SRMID+(-) swap pointsASK
USD
first leg value date CZK SRMID
Bank
Client
Dealer 1
Dealer 2

8. FX Swaps FX Swap Transactions 1st Leg Value Date 2nd Leg Value Date
Spot/forward
Fixed Period
spot
1, 2, 3, 6, and 12 months forward value date
Broken (Odd)
Dates
any day between two fixed forward value dates
Forward/forward
1, 2, 3 and 6 months forward value date
2, 3, 6, and 12 months
forward value date
Short Dates
O/N Overnight
today
first business day after today
T/N
Tomorrow-next
(Tom-next)
second business day after today (spot value date)
S/N
Spot-next
first business day after spot
S/W
Spot-1 week
1 week after spot