When the premium or discount is used as the swap interest rate, the price is quoted in the form of basic points. In the quotation of foreign exchange transactions, the base point refers to the fourth place below the decimal point and is the smallest unit of quotation. 1 The basic point is \frac%, that is, 0.000 1. According to the above figures, the discount of GBP is 0.0265438 USD +09, and the conversion rate is 2 19. Swap traders are concerned about the level of spot exchange rate and forward exchange rate, that is, the size of the basis point. Because only the size of the premium or discount determines whether the bank conducts swap transactions. When banks combine buying spot foreign exchange with selling forward foreign exchange in the same currency, if the currency is discounted, they will pay a certain cost. If the discount is too large, you should consider whether to do this transaction. Because banks need some foreign exchange, they can also use direct loans instead of swaps. You have to pay interest on borrowing money.
Therefore, when banks choose between loans and swaps, they will compare the interest rate of loans and the annual interest rate of swaps. The annual interest rate of the swap rate is the premium rate or discount rate. According to the above figures, the annual swap rate of this swap transaction is:
\ frac {1.7415-1.7634} {1.7634} \ multiplied by \ frac \ multiplied by 100%=4.97%.
Chase Manhattan Bank can engage in swap transactions if the loan interest rate is 5% or above. If the loan interest rate is lower than 4.97%, Chase Manhattan Bank can avoid the swap transaction, and the cost of direct borrowing is lower. Thus, the essence of swap transaction is to preserve value. For Barclays Bank, the essence of this swap transaction is soft currency speculation. It first sold the pound at a high price of 1 = 1.7634, and then bought it back at a low price of 1 = 1.54438+0 to make a profit. Barclays Bank should also compare the interest rate of foreign loans with the annual swap rate when engaging in such swap transactions. If the loan interest rate is higher than 4.97%, you will not engage in this swap transaction but lend directly. If the loan interest rate is lower than 4.97%, you can engage in this swap transaction.
In the foreign exchange transactions of American commercial banks, about 65% are spot foreign exchange transactions, 30% are swap foreign exchange transactions and 5% are forward foreign exchange transactions, which shows that swap transactions account for a considerable proportion in foreign exchange transactions.