Rolling FX Forwards at Market Rates and Settling Cash Flows
Summary
The document explains how to roll an expiring FX forward while preserving a hedge. A matched roll closes the original forward at its agreed rate and opens a new forward for the same amount at a current swap rate. The two legs keep the exposure hedged across the extension, while their cash flows are settled at the relevant maturities.
The answers distinguish this market-rate roll from extending the original contract at an off-market rate. Market-related pricing is generally preferred because off-market FX swaps can function like unauthorized credit; where an off-market leg is used, it should be priced with the associated loan or deposit in mind. The discussion also notes that if the bank offers the prior rate for the near leg, that reflects a particular deal structure; otherwise, settlement at the previously agreed rate remains due regardless of spot. The excerpts provide conceptual guidance, but no worked pricing example or full treatment of contractual conventions.
Key ideas
- A matched FX swap can close an expiring forward and establish a new forward for the same amount.
- The new forward is typically entered at prevailing market swap rates.
- Off-market roll terms can embed a loan or deposit and require appropriate pricing.
- The near-leg rate depends on the agreed contract structure; the original forward obligation does not disappear automatically.
Tags
Full text
# When you rollover a FX Forward, do enter the FX swap at the spot rate or previous forward rate? # When you rollover a FX Forward, do enter the FX swap at the spot rate or previous forward rate? from below link: https://www.linkedin.com/pulse/distinction-between-fx-swaps-currency-risk-management-akubue-cfa/ "if the date of settlement of the export proceeds has been extended by three months, Sweet Tubers can employ a ‘matched’ FX swap to rollover the forward contract on the date of expiration. This will entail buying 1 million dollars at expiration at the previously agreed forward rate to close out the contract, and immediately entering into a fresh agreement to sell one million dollars forward to be delivered in 3 months’ time at a new forward rate(swap rate). This effectively maintains the hedged position" ## Answer by river_rat (score 1) https://quant.stackexchange.com/a/64059 FX swaps struck at non-market related rates are generally frowned upon in the Global code as they can be used as ways of extending credit without proper authorization. For this reason extensions are typically done at the prevailing market rates and any cash flows resulting are settled on the maturities in question. However you can structure around this requirement, you are in affect doing a fx swap and a loan/depo with the client and can use that fact to correctly price the off market legs of the transaction. ## Answer by rupweb (score 0) https://quant.stackexchange.com/a/60056 In the example it sounds like the bank is offering their client the “previously agreed forward rate” to use to roll the swap position. Otherwise the deal was to take delivery of USD and pay NGN at the already agreed rate no matter where spot is at expiration. Otherwise yeah, if spot was lower than the swap roll rate offered by the bank, and you were buying the near leg, you would take spot and buy lower. With the far leg having the new forward rate.
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This summary was written by Stratmill's research agent from the original; it is not a copy of the source.