Currency Swap P/L

XxQuote399

Member
50 0
Hello,

How is the P/L for a currency swap ?

If I use a AUD/USD swap betting that AUD will cut rates how my profit/loss is different from a spot transaction ?
 

brettus

Experienced member
1,185 103
Hello,

How is the P/L for a currency swap ?

If I use a AUD/USD swap betting that AUD will cut rates how my profit/loss is different from a spot transaction ?

What are you doing exactly buy/sell audusd out for a month and hoping to sell/buy cheaper when they cut the rates? Im not sure what you could do with a spot transaction. Theres more risk for sure. Sell the futures and buy the spot?
 

XxQuote399

Member
50 0
yes sell the futures and buy the spot , or buy the futures and sell spot ? the futures will have a previous fixed interest rate ? is more a question I saw the chart on a swap and it is a huge black bar on the rate cuts announcement , theres a lot of margin avaliable on fx so I dont see why I would need a more leveraged riskier position

but how is the profit made from a Swap trade vs a spot trade ? where the profit is made if a swap is used for speculation ?
 

brettus

Experienced member
1,185 103
yes sell the futures and buy the spot , or buy the futures and sell spot ? the futures will have a previous fixed interest rate ? is more a question I saw the chart on a swap and it is a huge black bar on the rate cuts announcement , theres a lot of margin avaliable on fx so I dont see why I would need a more leveraged riskier position

but how is the profit made from a Swap trade vs a spot trade ? where the profit is made if a swap is used for speculation ?

I think the swap trade should be better because you won't be paying the huge spreads. What should happen if you sell the futures and buy the spot on a rate cut announcement. The futures should get closer to the spot. If you bought the swap value t+2 and t+30, you would have to roll it each day unless you wait for the announcement. I'm confused to which way round you should be too. I think its BUY/SELL on the swap also.
 

XxQuote399

Member
50 0
the rate cut wont be implied in the forward ? or the interest rate in the forward is pre-determined ? or is there a reason for the forward drop less than the spot ? after writing that just realized is because the forward is preced with the rates embedded until the expiring month

a fx swap is a pure play on currency interest rates ? or how to profit/speculate on a fx swap ?
 

brettus

Experienced member
1,185 103
the rate cut wont be implied in the forward ? or the interest rate in the forward is pre-determined ? or is there a reason for the forward drop less than the spot ? after writing that just realized is because the forward is preced with the rates embedded until the expiring month

a fx swap is a pure play on currency interest rates ? or how to profit/speculate on a fx swap ?

I think the forward will be adjusted for any future interest rate cuts. The forward price is lower because its adjusted for all the pips you make overnight holding a spot AUDUSD position. Say for example the forward price is 3 months out and you make 1 pip on the carry. Then the forward price should be about 90 points lower. Same as a stock thats adjusted for dividends. If there was a sudden rate cut that noone was expecting, then the carry may only be 0.75 pips adjusted for 90 days would be 67.5. So the future price should come in by 22.5 points. Doesn't that mean we should buy the future?

There's no way it would be that simple that you could buy the future and sell the cash when the rate cut is expected. The only thing you could do is trade with a bucketshop as it happens. They may price off bloomberg though.
 

XxQuote399

Member
50 0
Isnt the future pricey than the spot to incur the carry ? I mean gbpusd spot 1.5346 and gbp/usd 3m future 1.5580 for example

the forward is higher than spot to pay for the carry , I think that in term of movement they may more or less the same pips because of arbitrage but after the rate cut wont the carry of the other 3 months say 40 pips be also down along with the pips on the spot ?
 

brettus

Experienced member
1,185 103
Isnt the future pricey than the spot to incur the carry ? I mean gbpusd spot 1.5346 and gbp/usd 3m future 1.5580 for example

the forward is higher than spot to pay for the carry , I think that in term of movement they may more or less the same pips because of arbitrage but after the rate cut wont the carry of the other 3 months say 40 pips be also down along with the pips on the spot ?

No, If you think of it like a stock thats paying a dividend in June. the price of apple say is 460$. But the future price is 450$ for July Apple because they are paying a 10$ dividend in June. Its the same with AUDUSD. What did you say GBPUSD is on the future?

Spot 1.5351 June 1.5348 Sept 1.5340

I have the forward for GBPUSD for JUNE and SEPTEMBER trading lower than the Spot. You should sell that price if it's that high.

AUDUSD sept 0.9926 spot 1.0011. If you buy the spot then you're actually buying at a worse price than the futures, but you receive 1 pip everyday up until the september expiry. So it's the same.
 
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XxQuote399

Member
50 0
apple will pay the dividend so is negative carry but long aud you receive the carry if you short the aud is that it would be same you would have to pay the carry like a dividend on the stock price but aud and gbp are long carry
 

brettus

Experienced member
1,185 103
apple will pay the dividend so is negative carry but long aud you receive the carry if you short the aud is that it would be same you would have to pay the carry like a dividend on the stock price but aud and gbp are long carry

But if you buy the apple futures, then you're buying it 10$ lower than the spot, so its the same thing as buying the cash and receiving the dividend of 10$.

If you short AUDUSD spot then you are selling it higher than the futures, so you will be paying the 1 pip charge.

AUDUSD Sept 0.9926 spot 1.0011

Sell AUDUSD spot at 1.0011 pay 1 pip a day till expiry. 1.0011 - 85(no. of days) x 0.0001 = 0.9926. Same as sept
Buy AUDUSD spot at 1.0011 receive 1 pip a day till expiry 1.0011 - 85(no. of days) x 0.0001 = 0.9926. Same as sept.

Its the same formula because losing a pip makes your sell price lower(bad) and gaining a pip makes your buy price lower(good). If you look at it that way.
 
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XxQuote399

Member
50 0
I get your point but the forward has to have the next 3m interest rate price incurred if not would be a risk-free trade to buy now at 1000 sell the futures at 1000 and earn the carry so the futures have to be spot + 3m interest rate my guess is at a rate cut announcement both would drop the same points as of the spot but the forward would lose the .5% embedded interest price of the next 3m if is a 3m forward
 

XxQuote399

Member
50 0
but the swap is only a pure interest rate play ? if is a pure interest rate play it goes up and down or is the same interest unless theres a cut/hike ?
 

brettus

Experienced member
1,185 103
but the swap is only a pure interest rate play ? if is a pure interest rate play it goes up and down or is the same interest unless theres a cut/hike ?

It can fluctuate, but really not much. A pip is a lot for it to move without any sort of news or hint of a rate cut.

The spread moved in about 7 pips i think since the rate cut.
 
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brettus

Experienced member
1,185 103
I get your point but the forward has to have the next 3m interest rate price incurred if not would be a risk-free trade to buy now at 1000 sell the futures at 1000 and earn the carry so the futures have to be spot + 3m interest rate my guess is at a rate cut announcement both would drop the same points as of the spot but the forward would lose the .5% embedded interest price of the next 3m if is a 3m forward

Yea. So if the spot was to drop 1%. The futures should drop less because of the interest embedded would be reduced. So buy the futures and sell the spot.
 
 
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