Trading and Relative Value · Forwards Trading Guide
Different maturities embed different funding periods and risks. A curve trade is a position in their relationship, not simply two opposing trades that cancel.
Compare a consistent curve
Collect spot and forward quotes for several maturities at the same time and with the same currency direction. Convert points using the correct scale. Annualising a difference can help comparison, but does not turn a short maturity return into a guaranteed yearly outcome. Calendar effects and funding conditions may make the curve uneven.
Do not label the maturity gap profit
Suppose EUR/USD spot is 1.1000, a three month forward is 1.1040 and a six month forward is 1.1085. The 45 pip difference between the forward maturities is not free income. Buying one maturity and selling the other creates cash exchanges on different dates. Funding the interval and managing the intervening currency exposure are part of the trade.
Track both legs
A long near forward and a short far forward can express a view on the curve. Their values respond to spot, rates, basis and the remaining time of each leg. An equal currency notional does not mean all risks disappear. As the near leg settles, the remaining far leg still creates an obligation. Record the settlement cash and replacement funding rather than evaluating only the combined mark before the first maturity.
Evaluate a roll transparently
When replacing a maturing hedge, retain its realised result, the new forward rate and transaction costs as separate records. The new maturity may price at a different rate because of current funding and spot conditions. Compare the full hedge programme with its objective. A favourable looking new rate cannot erase an earlier cash loss.
Try it yourself
Two offsetting EUR forwards have equal notionals but settle three months apart. Can the treasury team assume no currency funding is required?
Show the worked answer
No. The separate dates can require interim currency funding. The team must map both gross exchanges and any agreed swap or netting arrangements.
Further reading
- BIS: FX swaps forwards and funding obligations
- CFA Institute: Currency management
- BIS: Covered interest parity and currency basis
Educational material. Numerical examples are hypothetical and exclude costs unless stated. Forward contracts create binding obligations and may require collateral or credit approval. Actual terms, access and risks depend on the agreement and jurisdiction.
