question about forex

My question is written at the last part( i still can’t understand the forex swap john…)
( i have pasted the last question and your response)

May 14, 2018 at 5:20 pm

thomas1212

Participant
My question is written at the last part( i still can’t understand the forex swap john…)
( i have pasted the last question and your response)

May 13, 2018 at 9:48 am

thomas1212
Participant
Hi john, you have mentioned that i can’t post a textbook question, therefore i have changed the company names of the question, and even the verbs and the amount.( i really can’t understand this one part, so i really need your help…)

The question is

we assume that a company called ACY Ltd need an initial investment of 200m won and it will be sold for 300m won in one year’s time.

The currency spot rate is 40 won per sgd(singapore dollar) and government has offered a forex swap at 40 won per sgd. ACY Ltd can’t borrow won directly and no forward market is available.

The estimated spot rate in one year is 80 won per sgd and the current singapore borrowing rate is 20%.

In the answer sheet, it is
with forex swap
– Buy 200m won at 40
– swap 200m won back at 40
– sell 200m won at 80
– interest on singapore loan ( 5mx 20%)

My question is that when, they buy at 200m won at 40, is this(40) the currency spot rate ? or the forex swap rate (and why is it ) ?

i stand on spot rate because we only consider swapping rate when we actually swap and swap back the currency not for buying the loan.

| QUOTE May 13, 2018 at 8:52 pm

John Moffat
Keymaster
It is the swap rate, because that is the offer that has been made.

– You have mentioned that we use the swap rate(for buying the loan) however, offer has been made to swap the currencies not for buying the loan isn’t ? therefore shouldn’t we suppose to use the spot rate to buy the loan ?

| QUOTE May 14, 2018 at 6:38 pm

John Moffat

Keymaster

The way the question is worded as you have typed it, I stand by my previous answer. If I am prepared to swap currencies with you, I can dictate any rate I want – it is your choice whether or not to accept the swap.

(Then i have 2 questions)
1. Does that mean that if just assuming that spot rate is lower than the government forex swap rate, then we use the lower rate ?

2. If number 1 question answer is yes, then we just always use the lower rate for buying the loan ?
if the number question answer is no, then how do i know which rate to use for the forex swap rate ?

3. will the forex swap rate provided by the bank or government always be lower than the spot rate ??

thanks john… ! i still have difficulties understanding it…