Currency Forwards

[scose-no-doubt]

So is this a testament to the faith the players have in a positive endgame for the EU or is this a matter of having to prop up the market/numbers for their own benefit? I'm struggling to see why Spain is so attractive to some

 

[Martinghoul]

So is this a testament to the faith the players have in a positive endgame for the EU or is this a matter of having to prop up the market/numbers for their own benefit? I'm struggling to see why Spain is so attractive to some

It's not a testament to anything... There's really no point in trying to extract some profound, life-altering meaning from every single random tick, auction and headline. Spanish bonds are selling well not because they're so attractive, but simply because the Spanish net supply is almost 0 for the rest of the year (i.e. it's just people reinvesting the coupons/redemptions).

 

[scose-no-doubt]

But why aren't they getting out? How long can they keep up with 6+% yields before they go Greek.

 

[Martinghoul]

But why aren't they getting out? How long can they keep up with 6+% yields before they go Greek.

If you're a Spanish institution (bank, insurance co, etc), why would you ever possibly want to get out?

 

[scose-no-doubt]

Well there's got to be some trade off between yield and credit risk and there're other govvies out there with same denomination but less chance of restructure looming. What am I missing?

 

[Martinghoul]

Well there's got to be some trade off between yield and credit risk and there're other govvies out there with same denomination but less chance of restructure looming. What am I missing?

You're missing the price... Those other govvies out there are a lot more expensive.

 

[scose-no-doubt]

fair enough...

 

[Lyapunov]

There's no such thing... There are FRAs that trade in each ccy, but they trade independently.

When you trade FX fwds (aka FX swaps), you will be trading a forward exchange rate. That rate is driven by the interest rate parity relationship. That is what the OP is referring to and that's not really related to FRAs. Sometimes people use the term "forward points" or just "forwards".

So, in answer to the original question, the fwd can decline not just because of the spot moving, but also because the pricing of the expected relative interest rates in the market has changed. For instance, you could see this occurring recently in EURDKK.

Thanks much. Very helpful.