For example, suppose a U.S. company is set to receive 10,000,000 pounds in three months and make a payment of 10,000,000 pounds in six months. To hedge against forward exchange rate risk, the company enters into a swap transaction.The 3-month forward exchange rate for the British pound is 1 British pound = 1.3662 U.S. dollars; the 6-month forward exchange rate for the British pound is 1 British pound = 1.3562 U.S. dollars. The specific analysis of the profit or loss resulting from the company’s swap transaction is as follows.
Selling 3-month GBP foreign exchange results in the following revenue:
10,000,000 × 1.3662 = 13,662,000 USD. The cost of buying a 6-month GBP forward contract is: 10,000,000 × 1.3562 = 13,562,000 USD.
Swap gain:13,662,000 – 13,562,000 = $100,000
Therefore, we can see that by entering into a forward-forward swap, the company can not only effectively hedge against foreign exchange risk but also generate $100,000 in revenue from the swap transaction.
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