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FRM Part I · FRM Exam Part I · Foreign Exchange Markets

A bank has sold EUR 10 million forward for value in 3 months to a client at 1.1000 USD per EUR. The bank covers the exposure today by buying EUR 10 million spot at 1.0950 and simultaneously arranging an FX swap to push the EUR value date out to 3 months. Spot is 1.0950, and the 3-month swap points are +30 (0.0030). Ignoring bid-ask spreads and funding beyond the swap, what is the bank's locked-in USD profit at the 3-month date from the forward sale versus its hedge cost?

The swap effectively gives the bank EUR for the 3-month date at 1.0980 (spot plus 30 points). Selling them to the client at 1.1000 earns 0.0020 per euro, or USD 20,000 on EUR 10 million. Comparing with spot 1.0950 would wrongly give USD 50,000.

  1. AUSD 20,000Correct
  2. BUSD 50,000
  3. CUSD 80,000
  4. DUSD 30,000

Explanation

The swap rolls the spot EUR purchase to 3 months at a forward price of 1.0950 + 0.0030 = 1.0980. The bank delivers EUR at 1.1000 to the client and effectively acquired them at 1.0980 for the same date. Profit = 10,000,000 x (1.1000 - 1.0980) = USD 20,000. Using the spot 1.0950 would give USD 50,000, ignoring the swap points.

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