Short-Dated Outrights
The treasurer of the German manufacturing company realizes that they also need to make a USD payment value tomorrow, for which it does not have the necessary dollars. The company asks its bank for a price whereby it sells EUR and buys USD in exchange, value tomorrow. In this case the bank will buy EUR and sell USD.
The market prices are as follows:Spot Rate
Forward/Swap Points
Period | Bid | Ask |
O/N | -0.0170 | -0.0160 |
Tom/Next | -0.0330 | -0.0260 |
Spot/Next | -0.0290 | -0.0210 |
The German company is quoted an outright price of 1.3791026 by their bank.
Is this outright price correct? The company is selling EUR and buying USD and is, therefore, dealing on the bid side of the spot market at 1.3791 which is correct. However, instead of using the bid tom/next swap points (–0.033), the offer tom/next swap points (–0.026) have been used. Although the tom/next swap points are shown as negative, they have been added to the spot rate. The transaction looks like this because we have come back in time.
With all outrights the first thing the bank trader must do is to lock in the spot rate and this is done here by selling the EUR for USD spot at 1.3791.
The bank now has the following two trades to settle:
- A purchase of EUR for USD value tomorrow with the German company
- A sale of EUR for USD value spot with an interbank counterparty