As liquidity in the market beyond a certain point dries up, the FX forward desk is no longer the pricing source for forward outrights and it shifts to the swaps desk. This situation changes quickly when you look to obtain pricing for longer term trades.
FX desks normally don’t include many additional charges due to the fact that most FX trades settle in less than 12 months, as noted above. These charges generally vary based on several factors, including the volatility of the currency pair and counterparty credit. What is considered “fair charges” can be estimated with the help of liquidity and credit calculators. These charges may include liquidity, credit, funding, margin and capital. One of the key components in the negotiation of non-centrally-cleared trades is the negotiation of add-on charges. Importantly, these desks sit under the FX department and clear their trades in the OTC currency market. For maturity dates with shorter tenors, the price of the forward outright comes from two desks within the bank, the spot desk and the forward desk. Typically, corporate treasuries contact their banks electronically and ask for a forward outright (or a batch/strip of forward outrights) with varying maturing dates. One essential decision is to consider if trading into one market produces a more cost effective hedge over another, and if so, how can that be evaluated?Īccording to the BIS Triennial Central Bank Survey of 2016, 97.5% of foreign exchange forward outright contracts traded have a maturity date of less than one year. The recent increase in financial markets volatility, driven by an expectation of continued rate hikes along with an unprecedented choice of financial markets instruments, makes hedging any corporation’s FX and rates exposure a challenging task. Manage Products and Account Information.
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