FX Trading Question
I would like to make sure my understanding of risk of fx swap is correct, and below is my interpretation of fx swap and its risk:
Any FX Swap trade take risk on the interest rate differential, or in other terms the demand of one ccy compared to another ccy
Assume I BUYSELL 1w EURUSD 50mio USD at 100 fwd pt (assume spot as 1.3)
I am expected to pay 50/1.3 mio EUR and receive 50mio USD at T+2 and pay 50mio USD and receive 50/1.31 EUR 1 week later
During T+2 and a week later, I am expected to roll my cash, and if the sum of fwd pt I take to roll(e.g. TN/ON/SN) until the far leg = 100, I will flatten my pnl from it
But with a portfolio or swaps, what we can see is cash flows in different tenor/maturity, for those negative USD funding, we are shorting US rate and longing EUR rate.
I hope my intuition is correct, and I have a few questions:
1. fwd point is determined by supply and demand, so actually its telling us the relative market price of US rate and EUR rate?
2. is there any benchmark for US rate and EUR rate that we might use to construct the fwd point (if yes, could have arbitrage opportunity?)
3. How should we look at the risk of FX Swap? it seems that traders are looking at the Cash Flow only to view the risk? from my perspective its better to have a expected sum of forward point (like 1W = 100, we need 5 days*20 TN to hedge it to be flat)
4. Am I missing the discounting effect on Cash Flow?
5. is fx trader commonly trading fx swap with ccs, basis and irs since all of them is relating to rate/relative rate?
procat, shame nobody has responded. Maybe one of these topics will help:
More suggestions...
If those topics were completely useless, don't blame me, blame my programmers...
1. when the fwd deviates from what's implied from theoretical pricing then the difference is chalked up to supply and demand which we conveniently refer to as xccy
2. ois, ois, xccy. of course arb exists
3. in the v short end you look @ funding exposure, further out it's your view on turns, rates, etc
5. fx swap traders are usually referred to as stirt (short term interest rate traders) and their mandate will cover a whole suite of rate products (futures, ois, irs, xccy). usually they market make up to a certain maturity then it goes to the xccy/ird desk
if I have the view on the US rates like in 1y, if I enter the swap, I still have to care about the daily funding right?
or to express the view on rate, usually we will use swap with near leg not being spot but things like 6x12?
I wonder how could we possibly observe or estimate the funding need...
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