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Long Term FX SWAP

cchien

Risk Quant, Jr.
Hi QuantNet user,
I'm working for life insurance co being risk engineer in risk management.
Now, I meet a pricing problem about FX SWAP, over 1 years. It needs your guys's help or give me any good solution if possible.
In most case, FX SWAP usually is within one years, so we can observe quotes swap points from market vendor, like Bloomberg, Reuters..... That kind of SWAP is OK.
Just interpolate theory forward rate from market forward quote. It's easy to do MTM.
My question is when I meet some customized FX SWAP, over 1 years or even to 5 years(because my company need hedging foreign investment to match insurance claim life.).
In this contract, we can't see long-term market forward quote from market. How to deal with MTM of them ? Long term contract are only on CCS ( Currency Cross SWAP ). Should I take CCS transform to theory forward rate by IRP ( Interest Rate Party) equation ?
Pls, guys can give me some solution.
Thanks a lot.
 
The other options are the Money Market Hedge and the currency options. A currency futures hedge will result in hedge errors when rolling contracts.
 
Hi QuantNet user,
I'm working for life insurance co being risk engineer in risk management.
Now, I meet a pricing problem about FX SWAP, over 1 years. It needs your guys's help or give me any good solution if possible.
In most case, FX SWAP usually is within one years, so we can observe quotes swap points from market vendor, like Bloomberg, Reuters..... That kind of SWAP is OK.
Just interpolate theory forward rate from market forward quote. It's easy to do MTM.
My question is when I meet some customized FX SWAP, over 1 years or even to 5 years(because my company need hedging foreign investment to match insurance claim life.).
In this contract, we can't see long-term market forward quote from market. How to deal with MTM of them ? Long term contract are only on CCS ( Currency Cross SWAP ). Should I take CCS transform to theory forward rate by IRP ( Interest Rate Party) equation ?
Pls, guys can give me some solution.
Thanks a lot.

What currency pair?
 
Hi financeguy,
Currency pair is USD/TWD.

Hmm sadly I don't know a great deal about USDTWD, but you should be able to obtain the forward points just by taking the interest rate differential for the desired tenor. A market maker would charge you 1-2bps mtm worth of spread I'd expect from there, unless there's some funny nuance with TWD that I don't know about.
 
The other options are the Money Market Hedge and the currency options. A currency futures hedge will result in hedge errors when rolling contracts.

would think a money market hedge is no good for a 5yr forward, though maybe im misunderstanding you
also there's no market for 5yr usdtwd options (though not sure how that would help anyway)
an fx swap is just an fx forward trade done at the same time as an fx spot trade in the opposite direction, so whats wrong with the forward hedge? that's the only moving component of the fx swap - the forward points.. dealers will give you a spot reference, then you just execute the spot deal off the ref, then add the forward points onto the spot ref and execute the forward deal off of that sum and there you have your fx swap.. the spot ref is just where usdtwd trades in the market, trivial to find.. forward points are all you need and that's just determined through interest rate differential between usd and twd.. though as i said before i don't know about any funny business specific to twd
 

cchien

Risk Quant, Jr.
Hmm sadly I don't know a great deal about USDTWD, but you should be able to obtain the forward points just by taking the interest rate differential for the desired tenor. A market maker would charge you 1-2bps mtm worth of spread I'd expect from there, unless there's some funny nuance with TWD that I don't know about.

thanks financeguy response. The method you said is Interest rate parity ( Theory Foreign Forward Rate). I know that.
But, the question is whether I use the same method for long-term ( > 1 yr) or short-term ( < 1yr) in pricing MTM ?
Now, I use different method to price MTM. In short term, I use to interpolate market forward rate from market. In long term, I use to IRP method to get theory forward rate.
 
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