Lesson 6 of 6 · All lessons in this module
- Building a cross-rate from two quotesVideo lesson
- Triangular arbitrage and reading currency moves
- Forward points, premiums and discounts
- The no-arbitrage link between spot, forward and interest ratesVideo lesson
- Forward points, maturity and the rate differential
- Integrated cases: hedging a receivable and comparing dealers
Lesson 6 of 6 · 16 min
Integrated cases: hedging a receivable and comparing dealers
A hedging case chains a cross-rate, a forward calculated from rates or points, a conversion of the receivable (divide when it is in the price currency) and a dealer comparison that may mix points with percentages.
In short
- Build the spot cross first, from whatever bridge currency the quotes share. Decide which currency is the base of the pair you need before you calculate.
- Hedge direction: a receipt in the price currency is hedged by buying the base currency forward. Amount in base: multiply by F; amount in price currency: divide by F.
- Forward points are scaled to the last decimal: F = S + points ÷ 10,000 (÷ 100 for yen). A percentage quote converts as F = S × (1 + %).
- Compare dealers in outright rates, not in points versus percent. Buy the base currency forward from the lower quote, sell to the higher.
- A forward discount on the base currency means its interest rate is higher than the price currency's; it is not a forecast of depreciation.
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