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FX Forward Points and FX Swap Pricing

Article Quant Q&A · Author: Student
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Summary

The document asks whether an FX swap can be priced by subtracting spot from the theoretical FX forward rate. The proposed forward calculation uses spot and the two currencies’ interest rates, and the question frames the swap value as the forward-minus-spot difference.

The reply says an FX swap is quoted in forward points relative to spot, so the conceptual relationship is the forward rate less spot, expressed according to the applicable market convention. It also clarifies that the interest rates must correspond to the two currencies in the quote. The exchange does not develop the formula, specify day-count or compounding conventions, or discuss collateral and curve construction, so it is a brief conceptual answer rather than a complete pricing guide.

Key ideas

  • An FX swap is quoted in forward points relative to spot.
  • Forward points reflect the difference between the forward rate and spot under the relevant quote convention.
  • The interest rates used must correspond to the currencies in the FX quote.
  • Market quoting conventions matter when translating a theoretical rate into a traded price.

Tags

ForexDerivatives pricing
Full text
# Is the pricing formula for FX Forwards the same for FX Swaps?


# Is the pricing formula for FX Forwards the same for FX Swaps?












If I use fwd_price = S*(1+r_term)/(1+r_base) to determine the theoretical value of a forward, how should I tweak the formula to price a FX swap? Assuming swap = fwd-spot, swap_price = S*(1+r_term)/(1+r_base) - S or not?

## Answer by AlRacoon (score 4)

https://quant.stackexchange.com/a/59882

Yes. The swap is quoted in fwd points relative to spot (sssuming that what you mean by r_term is the term interest rate of one currency and r_base the term interest rate of the other). Also, best to use market convention for the FX quotes.

Shown in full with attribution under the source's licence. Licence: CC BY-SA 4.0 (Stack Exchange)

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.