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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[1], 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.

[1] Even if we don't know "Discount", we can still figure out whether to subtract or add the swap points. Golden Rule [2] 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.

[2] 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".