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## Sunday, June 22, 2014

(label – FX)

See other posts on fwd swap point interpretation.
See other posts on how to compute fwd outright bid/ask without swap points -- using interest rate bid/ask.

Given spot bid/ask is 105.30/105.35 (whatever ccy pair - unimportant). Suppose swap points are quoted 1.10/1.05, we can deduce the asset currency is trading at a fwd Discount, because the swap quote is "high/low". Fwd Discount means that fwd outright price is Lower than spot price. Always treat the first currency as a commodity like silver.

Fwd outright bid/ask of the "silver" are 105.30 – 1.10 / 105.35 – 1.05

Note this is not some expectation/prognosis of an upcoming event, to-be-known. Instead, the 105.30 – 1.10 = 104.20 price is for execution today. Only the settlement is 1Y later.

 Even if we don't know "Discount", we can still figure out whether to subtract or add the swap points. Golden Rule  is, fwd outright bid/ask spread must be wider than spot bid/ask spread.

Therefore, Since swap bid (1.10) is Bigger than ask, we must Subtract it from spot bid. Subtracting a bigger number from bid is the only way to WIDEN the spread.

 in fact, the final bid/ask spread in fwd outright pips equals the spot spread + |swap point spread|. Here we take the abs value because we don't care if the swap points are quoted "high/low" or "low/high".