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## Saturday, April 25, 2015

### fwd-starting fx swap points

Q: If 9M outright fwd point is 15.2 pips, and 3M is 5 pips, what would be the fwd-starting swap point?

A: The swap point would be 15.2 - 5 = 10.2 pips.

The fwd point for a 3Mo (our near date) is F – S = S (1 + R * 90/360)/(1 + r * 90/360) – S, which already considers the 3Mo length.

This formula shows the
* near date fwd point number is linear with (R – r).
* far date fwd point number is linear with (R – r).

However, the linear factors in these 2 cases are Different so it's completely wrong to subtract like 12 – 5 basis points. Swap point reflects not only the IR differential, but also the "distance" and the spot level.

The swap points are smaller when the distance is short.

Suppose you as market take has an existing 3M fwd position and need to roll it forward. You effectively need to close the position for the original maturity and redo it at 9M. That's 2 transactions with 2 dealers -- unwise. Instead, You should go to one dealer to get a fwd-starting swap quote in bid/ask, without revealing your direction. The dealer would charge bid/ask only on the far leg, not twice on near leg and far leg.

Specifically, If there's a bid/ask on the 3M fwd point (1.2 pip for eg), that doesn't increase the swap point bid/ask spread, which would be the same bid/ask spread as the far leg fwd points.