Why FX Forwards Can Be Quoted as Spot Plus Swap Points

Summary

The response explains the relationship between an outright foreign exchange forward and a spot transaction combined with an FX swap. In the described construction, the spot purchase is offset by the swap’s initial exchange, leaving the same future currency delivery as the outright forward. It frames interbank pricing as two components: the spot rate and forward points, which represent the difference between spot and forward pricing.

This decomposition can explain why a trader might obtain a better combined price by sourcing spot and forward points separately. The best available spot quote and best available swap quote could come from different dealers, producing a better aggregate price than one dealer’s bundled outright quote. The reply presents this as a possibility, not a guarantee; it gives no transaction-cost measurements and does not discuss execution, credit, settlement, or liquidity constraints that could affect the comparison.

Key ideas

• An FX forward can be replicated with a spot transaction and an FX swap whose initial exchange offsets the spot flow.
• Interbank forward pricing can be viewed as spot pricing plus forward points.
• Sourcing spot and forward points from different dealers may produce a better combined quote than one dealer’s outright forward price.
• The potential pricing advantage is not guaranteed and the document provides no measured cost comparison.

Tags

# Why sometimes fx forward positions are built via spot + fx swap trades rather than outright fx foward trade?


# Why sometimes fx forward positions are built via spot + fx swap trades rather than outright fx foward trade?












Say instead of directly buying 2m EUR Jan 31,2024 forward, you buy 2m EUR spot and the swap that with Jan 31, 2024 as forward date. Why would transaction costs will be less than the outright forward trade?

## Answer by dm63 (score 2, accepted)

https://quant.stackexchange.com/a/76898

It really is the same trade because the spot flows exactly offset the initial exchange on the fx swap. The interbank market consists of two separate components a) spot prices and b) forward points representing the difference between spot and forward. So, if you ask a dealer for an outright forward price, you are going to get that dealer price for a)+b). It’s possible that this is a slightly worse aggregate price than getting the best dealer price for a) + the best dealer price for b), potentially with different dealers.

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