*FRM Learning Objectives:* Compare outright (forward) and swap transactions (FRM Part 1). Differentiate between the mechanics of foreign exchange (FX) swaps and cross-currency swaps (FRM Part 2).
Thanks for the video! so essentially the financing costs for the euros is 0.5%, with the swap. is there a significance or costs savings compared to just borrowing from the euro market in real life so it justify the swap?
@finRGB , So the notional value won't change as the FX rates are locked in at the beginning and since EUR/USD has their own interest rate (Interest rate parity). Won't it have two risk: 1) Interest rate fluctuation risk 2) FX currency risk (where proceeds are received in quote currency and to covert the the same in base currency?
It comes from the convention followed in forex markets. The 179.1 should be interpreted as number of "points", with each point being equivalent to 1/10,000 (hence the multiplication by 1/10,000 before adding to the spot exchange rate).
Thank you for the explanation ! I don’t understand the interest rate parity formula you introduce at the min 11:51, isn’t it suppose to be Fwd/Spot = (1+rEUR)/(1+rUSD) since USD is the domestic and EUR is the base (foreign) ?
Since our exchange rate quote is expressed as USD per unit of EUR, in the interest rate parity formula, (1 + r(USD)) goes in the numerator and (1 + r(EUR)) goes in the denominator.
@@mayssamahmoud3506 Sure, this video on the channel will help you with the formula and interpretation of the IRP: th-cam.com/video/yDTJRlRRKAI/w-d-xo.html
This is because forward exchange rates are quoted in points over and above the spot exchange rate. Before adjusting the spot, you need to divide the quoted amount by 10,000.
When you sell a position, you are shorting the position. When you buy a position, you are long the position. You short a position that you expect to go down in value. You Long a position when you expect a position to go up. For e.g. You expect Apple shares to go up. You buy 100 shares. Now you are long Apple & Short USD(implicitly). Meaning you expect better returns in Apple stock than USD(cash as deposit etc..) Hope it is clear.
Because the forward exchange rate "quotes" are in terms of no. of points. As a convention, the number of points needs to be first divided by 10,000 before adding to the spot rate to arrive at the precise forward exchange rate.
*FRM Learning Objectives:* Compare outright (forward) and swap transactions (FRM Part 1). Differentiate between the mechanics of foreign exchange (FX) swaps and cross-currency swaps (FRM Part 2).
Can you make separate video on
Differentiate between the mechanics of foreign exchange (FX) swaps and cross-currency swaps (FRM Part 2)
The best explanation of FX swaps! Thank you very much.
Unbelievably clear and helpful to curious layman. Thanks.
What a clear and concise explanation of fx swaps. Brilliant!
Amazing and sooooo helpful . Thank you so much
Great video, very informative! Can you also explain how do we perform B/S and S/B swap for deriving cash rate from spot rate
Great Explanation. Please upload av
Video on Different types of Forex transaction in detail. Thank you so much.
Thank you sir
Why did we divide the spot + fwd rate by 10000
Thanks for the video! so essentially the financing costs for the euros is 0.5%, with the swap. is there a significance or costs savings compared to just borrowing from the euro market in real life so it justify the swap?
@finRGB , So the notional value won't change as the FX rates are locked in at the beginning and since EUR/USD has their own interest rate (Interest rate parity).
Won't it have two risk:
1) Interest rate fluctuation risk
2) FX currency risk (where proceeds are received in quote currency and to covert the the same in base currency?
Thanks a lot🙏
Why is the rate = 1.2 + 179.1 / 10000? Where did the 10000 come from?
It comes from the convention followed in forex markets. The 179.1 should be interpreted as number of "points", with each point being equivalent to 1/10,000 (hence the multiplication by 1/10,000 before adding to the spot exchange rate).
i dont get the arithmetic
i got it!! Thanks for the very helpful explanation.
appreciate the effort but they way you explained is very confusing ...
Thank you for the explanation ! I don’t understand the interest rate parity formula you introduce at the min 11:51, isn’t it suppose to be Fwd/Spot = (1+rEUR)/(1+rUSD) since USD is the domestic and EUR is the base (foreign) ?
Since our exchange rate quote is expressed as USD per unit of EUR, in the interest rate parity formula, (1 + r(USD)) goes in the numerator and (1 + r(EUR)) goes in the denominator.
@@finRGB can you please give more explanation about it please ? In terms of foreign and domestic too ? Thank you !
The given formula on internet is: Ff/d = Sf/d * ((1+rf)/(1+rd)). f: foreign and d: domestic
Is it the correct one ?
@@mayssamahmoud3506 Sure, this video on the channel will help you with the formula and interpretation of the IRP: th-cam.com/video/yDTJRlRRKAI/w-d-xo.html
Great presentation, thank you sir, but can you tell me why u divided by 10,000 to get the fwd rate?
This is because forward exchange rates are quoted in points over and above the spot exchange rate. Before adjusting the spot, you need to divide the quoted amount by 10,000.
hi, in regards to your fwd contract. what happens if one year later the firm does not have 10 million euros to pay back ?
Great explainer video .At 2:50 , what does taking up long position means ?
Hello Aram, it means that you are buying Euro and if it appreciates against USD, you will gain.
When you sell a position, you are shorting the position.
When you buy a position, you are long the position.
You short a position that you expect to go down in value. You Long a position when you expect a position to go up. For e.g. You expect Apple shares to go up. You buy 100 shares. Now you are long Apple & Short USD(implicitly). Meaning you expect better returns in Apple stock than USD(cash as deposit etc..)
Hope it is clear.
The firm has to pay 12.24m and is receiving 12.17m from the fx swap, how in the net diagram is it making +0.05m , instead of -0.05m
The net diagram shows the 0.05 as a "downward pointing" arrow.
Mathematically adding spot rate to fwd rate 1.20 + 179.10 should be 180.30. How is it added to become 1.217910?
Because the forward exchange rate "quotes" are in terms of no. of points. As a convention, the number of points needs to be first divided by 10,000 before adding to the spot rate to arrive at the precise forward exchange rate.
Thanks for explaining so well.
can we apply hedge accounting for FX swap?