Tutorial 8

1. ANSWER: Swap points is the difference between the forward rate and the spot rate for a
particular currency pair when expressed in pips is typically known as the swap points. These
points are computed using an economic concept called Interest Rate Parity. This theory
implies that the hedged returns received after investing funds in different currencies should
equate irrespective of what their interest rates are.
● Forward premium
3-month forward USD/MYR = 0.0120 + 4.1280 = 4.1400
● Forward discount
6-month forward GBP/USD = 1.5560 - 0.0040 = 1.5520

2. a)

Answer: As the deal was contracted, the dealer is protected from fluctuations in currency
prices as the predetermined rate agreed by 2 parties was 6.8250.

(i) The dealer is facing counterparty risk in the form of pre-settlement risk as Bank Indo is
already in liquidation. In addition, the bank is also facing replacement risk as the forward rate
increase from 6.8250 to 6.8500.

(ii) The bank has to go to the interbank market immediately to buy another 10 million
GBPMYR forward contract at 6.8500 before the rate further deteriorate.

(iii) Since the deal was contracted, Bank Indo was liquidated and delivery is no longer
possible, the bank sees an immediate loss RM0.25 million.

In addition, if the dealer is not able to secure 10 million GBPMYR due to liquidity issue, then
the dealer NOSTRO account may be in deficit and expensive overdraft interest will be
charged.

b) Answer:

I. Transaction risk
II. Translation risk
III. Economic risk
IV. Trading risk

(Answer at Chapter 6 slide 13-18)

3. Answer:
(i) Stop loss point = 120,000/20,000,000 = 0.0060 points.
Therefore, stop loss rate = 3.4940-0.0060 = 3.4880
(ii) However, the USD strengthens and hits 3.4880, he will sell and suffers loss of:
20,000,000 x (3.4940 – 3.488) = -RM120,000

4) i) ANSWER:

To buy GBP/MYR 3 months forward

Therefore bank sells GBP/MYR 3 months forward

Use cross rates involving indirect/direct quotes

TTS 3 months GBP/MYR: (1.3330-0.0003) x (4.3030+0.0085)

= 1.3327 x 4.3115

= 5.7459 + 0.0005 (5 pips)

= 5.7464

ii). ANSWER:

Bid Offer

USD/MYR 4.3000 4.3030

2 month forward 4.3055 (4.3000+0.0055) 4.3090 (4.3030+0.0060)

3 month forward 4.3080 (4.3000+0.0080) 4.3115 (4.3030+0.0085)

The bank will offer him the rate of 4.3115 + margin of 5 pips = 4.3120

iii) ANSWER:

To buy USD/MYR value 8 January 2018

Bank sells USD/MYR value T/N

 Using backward valuation: (4.3030-0.0002) = 4.3028

(4.3028+0.0005) = 4.3033

iv) Answer:

I. Supply and demand

II. Central bank intervention
III. Year end seasonal demand factor
IV. Interest differentiate between two currency

5. ANSWER:

Trade No. 1: Buy 10 mil AUD/MYR@ 3.6570

Net FX position: Long 10 AUD/MYR@ 3.6570 ((10×3.6570)+(6×3.6580))/16=3.6574

Trade No. 2: Buy 6 mil AUD/MYR@ 3.6580
Net FX position: Long 16 mil AUD/MYR@ 3.6574

Trade No. 3: Sells 4 mil AUD/MYR@ 3.6600 ((16×3.6574)-(4×3.6600))/12=3.6565

Net FX position: Long 12 mil AUD/MYR@ 3.6565

Trade No.4: Sell 5 mil AUD/MYR@ 3.6610 ((12×3.6565)-(5×3.6610))/7=3.6533

Net FX position: Long 7 mil AUD/MYR@3.6533

Trade No. 5: Buy 12 mil AUD/MYR@ 3.6600 ((7×3.6533)+(12×3.6600))/19=3.6575

Net FX position: Long 19 mil AUD/MYR@ 3.6575

Trade No. 6: Sell 5 mil AUD/MYR@ 3.6620 ((19×3.6575)-(5×3.6620))/14=3.6559

Net FX position: Long 14 mil AUD/MYR@3.6559

(ii) ANSWER:
End of Day Net FX Position: Long 14 mil AUD/MYR @ 3.6559

b) ANSWER:
Square position at day-end
● Sell all 14 mil AUD to the market
 Assume he managed at the AUD/MYR rate of 3.6590, made a profit of MYR 43,400
((3.6590-3.6559) x AUD14,000,000)
Cover part of the position and leaving the rest overnight
● Assuming the dealer wants to leave 7 mil AUD overnight and sell 7 mil AUD .
If he manage to sell at the AUD/MYR rate of 3.6500, the dealer made the loss of
MYR 41,300 ((3.6559-3.6500) x AUD7,000,000)
● If at day end, AUD/MYR is 3.6590-600, the bank will revalue the remaining 7 mil
long AUD/MYR and have a revaluation profit of MYR 25,200 ((3.6595-3.6559) x
AUD7,000,000)
Keep the position and leave it overnight if expect the AUD to appreciate
● Revalue 14 mil AUD/MYR at day-end bid rate.
Assume the above position is held for 30days and sold at AUD/MYR rate of 3.6590,
the dealer makes the profit of MYR50,400 ((3.6595-3.6559) x AUD14,000,000)
● For each day the bank hold on the position, he is long AUD 14 mil in his nostro
account.
Assume the AUD and MYR interest is 6% and 3% respectively. As the bank long the
currency with higher interest (short with lower interest), the bank will earn a swap
point profit of (0.06-0.03) x 14,000,000 x 3.6595 x 30/360 = MYR128,082.50
● If the bank long a currency with lower interest (or short a currency with higher
interest), they will incur a swap point loss.
c)ANSWER:
● Keep the position and leave it overnight as expect the AUD to appreciate
● Stop loss rate by limit bank’s loss to RM60,000
Stop loss points=60,000/14,000,000=0.0043 points
Stop loss rate= 3.6559-0.0043=3.6516
● If AUD strengthens and hits 3.6638, he will sell and suffer loss of:
14,000,000 x (3.6559-3.6516)=MYR60,000

● Take profit of MYR80,000

Take profit point= 80,000/14,000000=0.0057 pips
● Therefore, take profit rate will be 3.6559 + 0.0057=3.6616
● If AUD appreciate to 3.6616, take profit order will be executed and profit of
MYR80,000