172 CHAPTER 5. USING FORWARDS FOR INTERNATIONAL FINANCIAL MANAGEMENT
Figure 5.1:Swap Quotes, bid and ask, fromDe Tijd
Termijnkoersen Bron: Dexia LIBOR
1 maand 2 maand 3 maaand 6 maand 12 maand Spot rate 30d
Amerikaanse dollar 19.20 19.28 37.30 37.50 58.82 59.07 115.00 115.60 229.60 231.00 1.1776 4.20
Australische dollar 46.00 46.60 84.20 85.10 128.00 130.00 239.00 242.00 464.00 468.00 1.5988 5.55
Brits pond... 13.40 13.60 24.20 24.50 36.50 36.80 65.70 66.40 121.00 123.00 0.6846 4.81
Japanse Yen -29.10 -28.80 -57.20 -56.80 -89.10 -88.60-177.00-176.00-370.00-366.00 139.7800 0.03
Nieuw-Zeelandse dollar... 80.10 81.10 148.00 149.00 226.00 228.00 425.00 429.00 818.00 829.00 1.7035 7.48
Zweedse Kroon -52.10 -47.80-132.00-126.00-189.00-181.00-372.00-356.00-655.00-607.00 9.5162 1.60
Zwitserse frank -21.40 -21.10 -39.70 -38.90 -60.00 -59.70-114.00-111.00-211.00-205.00 1.5491 0.80
eur 2.335quoted in foreign currency since the quotes against the euro are conventionally in
fcunits; and they are in basis points,i.e.hundredths of cents.
To compute the outright forward rates from these quotes, one adds the first swap
rate to the spot bid rate, and the second swap rate to the spot ask rate. The excerpt
shows the midpoint spot rate rather than the bid-ask quotes. Suppose, however, that
the bid and ask spot rates are (1.17)74-78 for theusd. Then the outright forward
rates, one month, are computed as follows:
- Bid : 1.1774 + 0.0001920 =usd/eur1.1775920.
- Ask: 1.1778 + 0.0001928 =usd/eur1.1779928.
DoItYourself problem 5.1
Check the interest rates, and note which ones are higher than theeurone. Figure
out which forward rates should be above par and which below. Verify that the signs
of the swap rates are correct, especially once you remember that theeuris thefc
(also for thegbpquote).
Note from the example that in case of a premium we always add the smaller of
the two swap rates to the spot bid rate, and the larger swap rate to the spot ask rate.
As a result, the forward spread is wider than the spot spread (Figure 5.2). Likewise,
in case of a discount, the number we subtract from the spot bid rate is larger, in
absolute value, than the number we subtract from the spot ask rate; and this again
produces a wider spread in the forward market than in the spot market (Figure
5.2). Finally, note that the difference between the swap rates becomes larger the
longer the contract’s time to maturity. This illustrates theSecond Law of Imperfect
Exchange Markets: the forward spread is always larger than the spot spread, and
increases with the time to maturity.
One explanation of this empirical regularity is that the longer the maturity, the
lower the transaction volume; and in thin markets, spreads tend to be high. A