Treasurer's Dilemma
A US-based company has payables and receivables in a number of foreign currencies. While preparing the cash flow forecast the company's Treasurer notices the following:
The Treasurer would like to use the GBP being received at spot to cover some of this USD borrowing requirement. However, by exchanging the GBP for USD now, it will expose itself to any GBP/USD rate movements when it is due to make a payment of GBP 1 million at the end of the month.
Treasurer's Solution
The solution is to transact a one month GBP/USD swap for GBP 1 million. So, it exchanges its GBP for USD now, and at the end of the month, it exchanges back its USD for GBP at a rate agreed today.
Assuming the market quotes the following rates: