A dealer hedges an outright forward with a spot trade and an FX swap
Table of Contents
1. Summary
An outright forward is equivalent to a spot trade plus an FX swap. Dealers construct and hedge outrights this way, because the spot trade carries the exchange-rate risk and the swap carries the forward points.
2. Detail
In practical dealing the forward book is separate from the spot book, and forward points are not quoted at the spot desk. The forward desk often belongs to the money market department.
IFRS 9 recognises the same split. Each forward has a spot element and a forward element, and an entity can designate only the spot element as the hedging instrument.
3. See also
- FX forwards — the structure note.
- FX Swap — completes: the instrument that holds the forward risk.
- A forward carries net fair value on balance sheet and its notional off it — completes: the accounting of the two elements.