Broken-Date Forward for a USD Receivable
On 29 September a UK manufacturer learns it will receive USD 6,000,000 on 17 November from a US customer. Spot value is 1 October (T+2). The treasurer wants to lock the sterling proceeds. The bank quotes GBP/USD spot 1.2710/1.2715 and forward points in pips (0.0001) as follows: one month 12/14, two months 26/29, three months 41/45. The payment date is a broken date, 47 days after spot value. The bank's convention is to interpolate linearly on a 30/360 basis between the 1M and 2M points. The manufacturer's board has approved hedging up to 90% of the exposure and requires a firm, unconditional rate rather than an option. The bank's credit team will require a facility for any mark-to-market exposure. The customer has warned that shipment could slip by up to two weeks, which would move the receipt to 1 December. The treasurer asks for the exact all-in rate for selling USD 6,000,000 on 17 November and for a plan if the date slips.
1. Calculate the all-in forward rate for selling USD 6,000,000 on 17 November and the sterling proceeds. State which spot and forward points you use and why.
Read the worked answer
The client sells USD to the bank, so the bank buys USD and sells GBP; use the bank's GBP/USD bid side: spot 1.2710 and bid forward points. The value date is 47 days after spot, between the 1M (30-day) and 2M (60-day) nodes. Interpolate bid points linearly: 12 + (26 − 12) × (47 − 30)/(60 − 30) = 12 + 14 × 17/30 = 12 + 7.93 = 19.93 pips, or 0.001993.
All-in forward bid = 1.2710 + 0.001993 = 1.272993. Sterling proceeds = 6,000,000 / 1.272993 = approximately £4,713,300.
The ask side would be 1.2715 + [14 + (29 − 14) × 17/30] pips = 1.2715 + 0.00225 = 1.27375, but that is not the side the client uses. A common error is to use the 2M points of 26 pips without interpolation; that would overstate the forward rate and understate sterling proceeds. Another error is to use the spot ask, which would produce a worse rate than the bank would actually quote.
2. The shipment slips to 1 December. Explain how the bank can adjust the hedge, and compare the economics and risks of a forward extension versus buying a 17 November–1 December option.
Read the worked answer
Because the receipt may move to 1 December, the 17 November forward no longer matches the exposure. The bank can extend the forward's value date by 14 days; this is not free. It is priced as a 17 November–1 December FX swap using the forward points for that period, and the all-in rate will change by the extension points. The client can also close out the original forward at the prevailing market rate, realising a gain or loss, and book a new 1 December forward. A third option is a 17 November–1 December option or a forward with a delivery window, which preserves flexibility but costs a premium or a wider spread.
A firm unconditional forward cannot be backdated or rebooked at the old rate to hide the loss; that would be a false record. The treasurer should compare the extension cost, the close-out cost, and the option premium, and check the 90% hedge authority. The bank should document the instruction and the new value date. Liquidity risk remains because the mark-to-market and collateral requirement continue until the new maturity. If the date is genuinely uncertain, a forward with a delivery window or an option may be cheaper than repeatedly rolling a firm forward.